<PAGE>

================================================================================

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

    (Mark One)
      [X]     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
              SECURITIES AND EXCHANGE ACT OF 1934.
              For the fiscal year ended December 31, 1998
                                   OR
      [ ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
              SECURITIES AND EXCHANGE ACT OF 1934.
              For the transition period from_________ to _________

                         Commission file number 0-28706
                                                -------

                           FIRST ALLIANCE CORPORATION
             (Exact name of registrant as specified in its charter)

              DELAWARE                                33-0721183
              --------                                ----------
   (State or other jurisdiction of       (I.R.S. Employer Identification Number)
   incorporation or organization)

   17305 VON KARMAN AVENUE, IRVINE, CALIFORNIA             92614
   -------------------------------------------             -----
   (Address of principal executive offices)              (zip code)

        Registrant's telephone number, including area code (949) 224-8500

        Securities registered pursuant to Section 12(b) of the Act: None

        TITLE OF EACH CLASS            NAME OF EACH EXCHANGE ON WHICH REGISTERED
        -------------------            -----------------------------------------
 Class A Common Stock, par value $0.01       NASDAQ National Market System

        Securities registered pursuant to Section 12(g) of the Act: None

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment of this
Form 10-K. [ ]

     As of February 1, 1999, the aggregate market value of voting stock held by
nonaffiliates of registrant was approximately $18.8 million.

     As of February 1, 1999, the issuer had outstanding, net of treasury shares,
18,139,488 shares of Class A Common Stock.

                      DOCUMENTS INCORPORATED BY REFERENCE:

     The information required by Part III, Items 10, 11, 12 and 13 is
incorporated by reference to First Alliance Corporation's proxy statement which
will be filed with the Commission not more than 120 days after December 31,
1998.
================================================================================



<PAGE> 



                                     PART I


ITEM 1.  BUSINESS

GENERAL

    First Alliance Corporation ("FACO"), together with its subsidiaries (the
"Company"), is a financial services organization principally engaged in mortgage
loan origination, purchases, sales and servicing. Loans originated by the
Company through its retail branch offices primarily consist of fixed and
adjustable rate loans secured by first mortgages on single family residences.
The majority of the Company's loans are made to owners of single family
residences who use the loan proceeds for such purposes as debt consolidation and
financing of home improvements. Typically, the Company's borrowers are
individuals who do not qualify for conventional loans because of impaired or
unsubstantiated credit characteristics and/or unverifiable income, and whose
borrowing needs are not met by conventional lending institutions. Other
borrowers include individuals who may qualify for a conventional loan but find
the Company's loans attractive due to the Company's personalized service and
rapid funding capability. The Company either securitizes the loans in a trust or
sells them to wholesale purchasers. Loans sold to wholesale purchasers are sold
on a servicing released basis. The Company currently services 10,853 loans,
representing a balance of approximately $866 million. Of such balance, 43%
represent loans secured by California properties. A significant portion of the
mortgages are securitized with the Company retaining the right to service the
loans. The Company is currently licensed to engage in the mortgage finance
business in 18 states, the District of Columbia and the United Kingdom.

    To identify potential customers, the Company utilizes a proprietary
marketing methodology. This methodology focuses on a distinct segment of the
home equity lending market. This segment represents homeowners believed by
management, based on historic customer profiles, to be pre-disposed to using the
Company's products and services, and who satisfy its underwriting guidelines.
Using information obtained from a variety of outside sources for new and
existing markets, the Company develops a list of homeowners ("Homeowners") with
characteristics that make them likely customers. The Company then focuses its
telemarketing and mailing efforts on these identified Homeowners.

    Prior to 1994, all of the Company's operations were conducted from retail
branch offices located in California. Since 1994, the business strategy of the
Company has been to expand its retail branch office operations to states other
than California in order to maximize opportunities that exist in new markets.
Currently, the Company has 32 retail branch offices in the United States, and
has identified additional locations in the Company's current markets in which it
may open new retail branch offices in the future.

    The Company is primarily a retail originator of loans, with 86% of its loan
volume in 1998 coming from its retail branch operations. Besides a strong
emphasis placed on its marketing and sales efforts, the Company provides a high
degree of personalized service and timely response to loan applications.
Historically, the Company's customers have been willing to pay the Company's
loan origination fees and interest rates which are typically higher than those
charged by conventional lending institutions.

    The Company has maintained conservative underwriting guidelines when
originating and purchasing loans. The predominant portion of the Company's loans
originations carry relatively low loan-to-value ("LTV") ratios, which mitigates
the credit risk associated with such obligations. In conjunction with the
Company's disciplined collection and foreclosure practices, this approach has
allowed the Company to maintain low delinquency and loan losses relative to
others in the industry. In addition, the Company originates loans with higher
levels of credit risk to earn origination fees, however, it generally sells such
loans on a servicing released basis to companies with higher LTV risk tolerance.


RECENT DEVELOPMENTS

    In April 1998, the Company discontinued its high LTV loan origination
program because adverse changes in the secondary market for these loans
significantly reduced the profitability of this program. Since the inception of
the program in July 1997, less than $4.0 million of high LTV loans were
originated by the Company.

                                       1

<PAGE> 

    In June 1998, the Company discontinued its low LTV loan purchase program.
The Company's decision to discontinue this program is attributable to lower than
expected results in marketing, including lower than expected additional
borrowings by homeowners with low LTV loans. Purchases related to this program
totaled $24.5 million and $61.5 million in 1998 and 1997, respectively.

    During the fourth quarter of 1998, the Company's $175 million, $125 million,
and (pound)50 million warehouse financing facilities expired and were not
renewed. In December 1998, the Company entered into a $150 million warehouse
financing facility and a secured term loan facility of approximately $66
million. As partial consideration for the $150 million warehouse financing
facility, the Company agreed to grant the warehouse lender stock warrants. These
stock warrants give the lender the option to purchase one percent (1%) of the
Company's then outstanding Common Stock on a diluted basis, and become effective
in February 1999. The $66 million secured term loan facility was entered into
with a Company owned by the majority stockholders of FACO, Brian and Sarah
Chisick. This facility matures as the underlying United Kingdom pledged
mortgages are liquidated.

    In December 1998, the Company discontinued both loan originations in the
United Kingdom and also the marketing efforts with regard to its real estate
secured credit card program. The discontinuation of such programs was primarily
due to results that were lower than initially anticipated. The Company will
continue to service the existing United Kingdom loans of approximately (pound)38
million and credit card accounts of approximately $26 million. The Company
currently intends to hold the United Kingdom loans to maturity, and therefore
has reclassified such from loans held for sale to loans receivable held for
investment. The Company does not believe that the discontinuation of these
programs will have a material effect on the Company's financial condition,
result of operations or cash flows.


    RETAIL BRANCH EXPANSION

    As part of its continuing retail branch network expansion, the Company
opened 6 branch offices in 4 states during 1998. The Company opened seven branch
offices in both 1997 and 1996.


MARKETING AND SALES

    MARKETING

    The Company's marketing efforts are designed to identify individuals who,
based on the Company's historic customer profiles, display a statistical
likelihood for becoming a consumer of the Company's products and services and,
at the same time, satisfy the Company's underwriting guidelines. The Company
believes its focused marketing approach results in a lower overall marketing
cost per funded loan as compared to a broad indiscriminate marketing approach
aimed at a wide range of homeowners.

    The Company utilizes a proprietary marketing methodology to subjectively
analyze the Company's historical customer base to identify characteristics
common to its customers. These common characteristics are integrated with
information obtained from a number of outside sources related to the homeowner
pool in new or existing markets. The characteristics of individual homeowners
and their properties in the homeowner pool are compared with characteristics
common to the Company's historical customer base to identify and locate
Homeowners with characteristics that make them likely to become customers for
the Company's products and services and to satisfy its underwriting guidelines.


    MAILING CAMPAIGNS AND TELEMARKETING

    The Company's mailing and telemarketing campaigns focus on Homeowners in the
communities surrounding its 32 retail branch offices. These campaigns focus on
the multiple benefits of the Company's services and loan products. The Company
distributes over 1.7 million pieces of mail monthly. All of the Company's
mailing campaigns originate from its mail processing center in Irvine,
California. The Company's mailing campaigns result in over 4,000 inbound loan
inquiry calls from Homeowners monthly. The Company continually monitors the
effectiveness of each of its mailing and telemarketing campaigns and continues,
modifies or discontinues a particular campaign based on the results of such
monitoring.

                                       2

<PAGE> 


    The Company's telemarketing department handles both inbound and outbound
calls from and to Homeowners and existing customers. Substantially all of the
inbound calls are from Homeowners responding to the Company's mailing campaigns.
The Company monitors the effectiveness of each mailing campaign by tracking
which campaign is the source of each inbound call. The outbound telemarketing
department uses computerized predictive dialers to continually solicit the
Homeowners and the Company's current borrowers.

    The telemarketing representative's responsibility is to describe the
benefits of the Company's products and services, obtain information about the
Homeowner, the subject property and the purpose of the loan and schedule an
appointment to have a Company appraiser visit and inspect the subject property
(an "Appraisal Appointment").

    Individual telemarketing representatives are rated and compensated based on
the number of Appraisal Appointments set. The Company monitors the performance
of its telemarketing staff on a weekly and monthly basis.


    APPRAISAL

    The Company's valuation process occurs throughout the loan application
process. In many cases, the first stage valuation occurs immediately after a
telemarketing representative sets an Appraisal Appointment. Staff at the
Company's headquarters gather publicly available information with respect to
recent sales of comparable properties in the same area as the subject property.
The estimated value of the subject property is verified by the comparable sales
data. Only properties that satisfy this stage of the initial underwriting
process will be verified and forwarded to the respective retail branch offices
for Appraisal Appointments.

    The property is appraised typically within two days of the initial
telemarketing contact. This appraisal, which provides a valuable marketing
opportunity, is the applicant's first face-to-face contact with the Company's
representatives. The appraiser's responsibilities are to perform a complete
technical appraisal of the subject property and schedule an appointment with a
loan officer (a "Sales Appointment").

    Senior appraisers at the Company's headquarters perform a desk review of the
property appraisal on the following loan applications: (i) all properties with a
market value above $250,000 or less than $100,000, (ii) all loan applications
with a combined LTV equal to or greater than 68%, (iii) all loan applications
prepared by a new retail branch office for the first 90 days of its existence,
(iv) all income properties, and (v) approximately 10% of the loan applications
not otherwise reviewed.

    Unlike many of its competitors in the United States, the Company does not
use independent fee-based appraisers. Instead, the company recruits, hires and
trains its own field and desk appraisers. In connection with each securitization
of the Company's loans, independent appraisers have conducted appraisals on a
randomly selected sample of the subject properties that are the collateral for
the securitized loans. The valuations of the sample properties determined by the
Company's appraisers have, on average, been 2.75% more conservative than the
valuations determined by such independent appraisers.

    The Company hires certified or licensed appraisers in those states which
require such designations. Individual retail branch office appraisers are rated
and compensated based on the ongoing quality of appraisals performed and the
number of Sales Appointments set. The Company monitors the performance of its
appraisers on a weekly and monthly basis.


    RETAIL BRANCH OPERATIONS

    The retail branch offices are responsible for the next step in the sales
process that, if successful, converts the Sales Appointments set by the
appraisers into underwritten loan files to be submitted to the Company's quality
control department. Each Sales Appointment allows the sales personnel to clearly
determine the applicant's need for financing, tailor a loan program to fit the
applicant's financial needs, perform preliminary underwriting and provide to the
applicant a choice of loan products and a detailed explanation of the various
loan terms.

                                       3
<PAGE> 


    The loan officer utilizes a loan origination software system developed by
the Company to preliminarily determine an applicant's qualification for the
various products offered by the Company. The loan origination software system
incorporates the Company's underwriting guidelines with respect to collateral,
credit quality, character, and capacity to repay. The retail branch loan officer
or branch manager will run a credit report for each applicant. The Company
utilizes a mortgage rating and/or credit score ("FICO Score") derived from a
credit scoring model developed by an independent third party. Based upon such
factors, an applicant is preliminarily designated as an "A," "B," "C" or "D"
risk. This designation is reviewed by the Company's centralized quality control
and underwriting department before final approval.

    The typical retail branch office consists of a branch manager, one or two
loan officers, one or two appraisers and one or two loan processors. The Company
generally recruits and hires its loan officers in the location of the branch
office. The Company focuses on candidates with professional sales experience for
loan officer positions. Loan officer and branch manager candidates are required
to successfully complete four weeks of sales and technical underwriting training
to learn the Company's sales presentation and lending procedures prior to their
placement in a retail branch office. Retail branch office sales personnel are
required to attend quarterly regional sales and technical training meetings.

    Loan officers and branch managers are rated and compensated based on loans
funded. The Company strives to develop its loan officers and to promote the most
qualified loan officers to branch managers. The Company monitors the performance
of its loan officers and branch managers on a weekly and monthly basis.


LOAN ORIGINATION AND ACQUISITION THROUGH THIRD PARTY ORIGINATORS

    The Company has historically augmented its loan production by purchasing
loans from other affiliated and unaffiliated originators. The Company and these
originators have entered into mortgage loan purchase agreements which require
specified minimum levels of experience in origination of non-conforming mortgage
loans and provide representations, warranties and buy-back provisions which are
substantially similar to the representations and warranties required of the
Company for the securitization of its own loan originations.


UNDERWRITING

    The main underwriting and quality control functions are centralized at the
Company's headquarters. The most significant of the Company's underwriting
functions are performed by senior management. The Company maintains quality
control and underwriting departments. The Company strives to process each loan
application received from its retail branch office network as quickly as
possible in accordance with the Company's loan application approval procedures.
Accordingly, most loan applications receive decisions within three days of
receipt and are funded within 18 days of approval.

    After a full review by the quality control department, each initial loan
application file is forwarded to the loan committee for approval. Loans that
clearly conform to the Company's underwriting guidelines are approved at the
first level of review. Other loans that present more complicated underwriting
issues are reviewed by senior underwriting personnel.

    The decision of the loan committee to approve, decline or modify a loan is
based upon a number of factors, including the appraised value of the property,
the applicant's credit quality and the Company's perception of the applicant's
ability to repay the loan. With respect to the value of the collateral, loans
secured by first mortgages are generally limited to a maximum 75% combined LTV;
however, the Company will originate loans with a combined LTV of up to 90% for
loans expected to be sold on a whole loan basis. Loans secured by second
mortgages are limited to a maximum 75% combined LTV. The Company has established
classifications with respect to the credit profiles of loans and subject
properties based on certain of the applicant's characteristics. Each loan
application is placed into one of the Company's four ratings ("A" through "D,"
with subratings within those categories), depending upon the following primary
factors: (i) an applicant's mortgage rating, (ii) an applicant's FICO Score, and
(iii) combined LTVs. Terms of loans made by the Company vary depending upon the
classification of the application, the debt to income ratio and other factors.
Applications with lower classifications generally are subject to higher interest
rates due to the increased risk inherent in the loan. The table below indicates
the minimum credit ratings and maximum LTV by credit risk:

                                       4

<PAGE> 

<TABLE>
<CAPTION>

                                                         "A/A-"      "B/B-"      "C/C-"        "D"
                                                        ---------   ---------   ---------   ---------
         <S>                                            <C>         <C>         <C>         <C>
         Minimum Mortgage Rating (1)                    2 x 30      2 x 30      12 x 30     12 x 30
                                                        0 x 60      1 x 60      12 x 60     12 x 60
                                                             -           -      12 x 90     12 x 90
                                                             -           -      1 x 120     2 x 120
                                                             -           -                  1 x 150
         Minimum FICO Score..............                  650         575          500           0
         Maximum LTV.....................                   80%         75%          70%         65%
</TABLE>


    (1)  The mortgage rating is comprised of two components. The first component
         represents the number of times the borrower has been delinquent,
         whereas the second component represents the number of days delinquent.
         For example, 2 x 30 represents a borrower who has been 30 days
         delinquent twice.

    In addition to the above criteria, the Company requires higher interest
rates on loans with certain risk factors. These factors include, among others,
an unsubstantiated employment history, a recent foreclosure proceeding, a number
of recent delinquent payments on an existing mortgage, a recent bankruptcy
filing, non-owner occupied properties, rural properties or the presence of a
senior mortgage or zoning restrictions on the subject property.

    The following table reflects the risk classifications of the Company's loan
originations and purchases in 1998:

<TABLE>
<CAPTION>


                                                   TOTAL                       WEIGHTED
                                                (DOLLARS IN     % OF        AVERAGE INITIAL
          LOAN CLASSIFICATION                    THOUSANDS)     TOTAL        INTEREST RATE
------------------------------------            -----------    -------      ---------------
<S>                                             <C>             <C>         <C>
"A" Risk............................               204,060       38.2               9.02
"B" Risk............................               204,821       38.4               9.39
"C" Risk............................               117,455       22.0               9.71
"D" Risk............................                 7,257        1.4              10.78
                                                -----------    -------      ---------------
   Total............................               533,593      100.0               9.34
                                                ===========    =======      ===============
</TABLE>


                                       5


<PAGE> 


LOAN ORIGINATIONS AND PURCHASES

    The following table presents selected information relating to the
origination and purchase of loans by the Company for the years ended December
31:
<TABLE>
<CAPTION>


                                                       1996           1997          1998
                                                      ------         ------        ------
    <S>                                               <C>            <C>           <C>
    Type of property securing loan:
        Single-family...........................         95%            91%           89%
        Multi-family and other..................          5              9            11%
                                                      ======         ======        ======
                                                        100%           100%          100%
                                                      ======         ======        ======
    Type of mortgage securing loan:
        First lien..............................         99%            99%           99%
        Junior lien.............................          1              1             1%
                                                      ======         ======        ======
    Total.......................................        100%           100%          100%
                                                      ======         ======        ======

    Weighted average interest rate..............        9.6%           9.5%          9.3%
    Weighted average initial combined LTV (1) ..       62.2%          62.5%         65.3%
</TABLE>


(1)     The LTV of a loan secured by a senior mortgage is determined by dividing
        the amount of the loan by the appraised value of the mortgaged property
        at origination. The combined LTV of a loan secured by any junior
        mortgage is determined by taking the sum of the loan secured by such
        mortgage and any senior mortgages and dividing by the appraised value of
        the mortgaged property at origination.


LOAN SALES

    SECURITIZATION

    In a securitization, the Company exchanges loans for regular interest
certificates and residual interest certificates in a trust. The regular interest
certificates are immediately sold by the Company to the public for cash. As the
holder of the residual interest certificates, the Company is entitled to receive
certain excess cash flows. These excess cash flows are the difference between
(a) the principal and interest paid by borrowers and (b) the sum of (i)
scheduled principal and interest paid to holders of the regular interest
certificates, (ii) trustee fees and master servicer fees, (iii) third-party
credit enhancement fees, (iv) servicing fees and (v) loan losses. The Company
begins receiving these excess cash flows after certain overcollateralization
requirements, which are specific to each securitization and are used as a means
of credit enhancement, have been met.

    The Company arranges for credit enhancement to achieve an improved credit
rating on the regular interest certificates issued. This credit enhancement
generally takes the form of an insurance policy, issued by a monoline insurance
company, ensuring the holders of the regular interest certificates of timely
payment of scheduled principal and ultimate payment of scheduled interest at the
pass-through rate. In addition, the securitization trust structure typically
includes overcollateralization as an additional means of credit enhancement. The
purpose of the overcollateralization is to provide a source of payment in the
event of higher than anticipated loan losses. Overcollateralization requirements
may include an initial deposit, the sale of loans at less than par or retention
in the securitization trust of collections from the pool until a specified
overcollateralization amount has been attained. This retention of excess cash
flow creates a faster amortization of the scheduled balance of the regular
interest certificates than the amortization of the principal balance of the
mortgage loans in the securitization pool. Losses resulting from defaults by
borrowers on a payment of principal or interest on the loans in the securitized
pool will reduce the overcollateralization to the extent that funds are
available and may result in a reduction in the value of the residual interest
certificates held by the Company. If payment defaults exceed the amount of
overcollateralization and excess cash flows, the insurance policy will pay any
further losses experienced by holders of the regular interest certificates in
the related securitization trust.

                                       6

<PAGE> 


    Generally, the Company sells loans to a securitization trust at face value,
except when it sells loans at less than par for overcollateralization purposes.
Loans are sold without recourse except for certain representations and
warranties provided by the Company. Under the terms of the pooling and servicing
agreements entered into in connection with a securitization, the Company may be
required either to repurchase or to replace loans that do not conform to such
representations and warranties. To date, the Company has not been required to
substitute or repurchase any such loans.

    The Company retains the right to service loans it securitizes. In addition
to management servicing fees, the Company also receives prepayment penalties and
other ancillary servicing fees on securitized loans.

    Gains on servicing retained-sales of loans through securitization represent
the difference between the net proceeds to the Company in the securitization and
the allocated cost of loans securitized. In accordance with SFAS No. 125, the
allocated cost of the loans securitized is determined by allocating their
acquisition cost (for purchased loans) or net carrying value (for originated
loans) between the loans securitized, the residual interests, and the mortgage
servicing rights retained by the Company based upon their relative fair values.
At origination, the Company classifies the residual interests as trading
securities, which are recorded at fair value. The difference between fair value
of residual interest certificates and their allocated cost is recorded as gain
on securitization and is included in loan origination and sale revenue.


    WHOLE LOAN SALES

    Certain loans originated by the Company are not chosen for inclusion in a
securitization. These loans may include loans with higher combined LTVs and/or
loans that have higher credit risk. The Company will originate these loans to
earn the origination fees and will then sell such loans to wholesale purchasers
on a servicing released basis to avoid the credit risks related to such loans.
The Company anticipates that it will continue to sell certain loans on a whole
loan basis.


INTEREST RATE RISK MANAGEMENT

    The Company's profitability is in part determined by the difference, or
"spread," between the effective rate of interest receivable on the loans
originated or purchased by the Company and the pass-through interest rates
payable to regular interest certificates issued in securitizations. Between the
time a loan commitment is made or a loan is purchased and the time such loan is
sold or securitized, the spread can be adversely affected by increases in the
interest rate demanded by purchasers or investors in the Company's
securitizations.

    The Company has implemented a hedging program designed to provide a level of
protection against the impact of rapid changes in interest rates on the value of
domestic fixed rate loans from the time the Company commits to fund or purchase
such loans to the date of their securitization or sale. The Company does not
hedge the interest rate risk associated with holding adjustable rate mortgages
pending their securitization or sale due to the decreased significance of such
risk as the pass-through rates for regular interest certificates related to the
Company's adjustable rate mortgage pools are also adjustable.

    The Company's hedging program, which was initiated in 1994, has been limited
to selling short or forward sales of United States Treasury securities and
prefunding loan originations in its securitizations. United States Treasury
securities are utilized by the Company due to the liquidity of the market for
such securities and the high degree of correlation between such securities and
the pass-through interest rates for regular interest certificates in the
Company's fixed rate mortgage pools. Prefunding allows the Company to fix the
relationship between the interest rates charged on the loans and the
pass-through rates for the regular interest certificates by permitting the
Company to deliver loans to a securitization trust after the date of its
closing.

    The Company may utilize various financial instruments in its hedging
activities. The nature and quantity of hedging transactions are determined by
the Company's management based on various factors, including market conditions
and the expected volume of mortgage loan originations and purchases. To decrease
market risk, only highly liquid instruments are utilized in the Company's
hedging activities. By their nature, however, all such instruments involve
risks, and the maximum potential loss may exceed the value at which such
instruments are carried. As is customary for these types of instruments, the
Company does not require collateral or other security from counterparties to
these instruments. The Company manages its credit exposure to counterparties
through credit approvals, credit limits and other monitoring procedures.

                                       7

<PAGE> 


    The Company's hedging program, which was initiated in 1994, has been limited
to selling short or forward sales of United States Treasury securities and
prefunding loan originations in its securitizations. United States Treasury
securities are utilized by the Company due to the liquidity of the market for
such securities and the high degree of correlation between such securities and
the pass-through interest rates for regular interest certificates in the
Company's fixed rate mortgage pools. Prefunding allows the Company to fix the
relationship between the interest rates charged on the loans and the
pass-through rates for the regular interest certificates by permitting the
Company to deliver loans to a securitization trust after the date of its
closing. See Statement of Financial Accounting Standard No. 133, "Accounting for
Derivative Instruments and Hedging Activities," under the effects of recent
accounting pronouncements section.


FOREIGN CURRENCY RISK

    In December 1998, the Company entered into an approximately $66 million
secured term loan facility in order to provide long-term financing for its
United Kingdom subsidiary. The underlying collateral for the facility represents
United Kingdom mortgage loans. Consequently, the Company bears a foreign
currency risk between the assets held by the United Kingdom subsidiary and the
obligation of debt. The Company is currently in the process of evaluating the
possibilities of entering into a foreign currency hedge to protect itself from
foreign currency fluctuations.


SERVICING

    The Company retains the right to service the loans on behalf of the
different trusts established at the time of securitization. Loan servicing
includes collecting payments from borrowers, remitting payments to investors who
have purchased the certificates issued by the trusts, advancing delinquent
payments, and other advances as needed to protect the certificate holders,
investor reporting, accounting for principal and interest, contacting delinquent
borrowers, conducting foreclosure proceedings and disposing of foreclosed
properties. The Company's servicing portfolio included 10,853 loans with an
outstanding balance of $866 million as of December 31, 1998. Approximately $64
million of the outstanding balance of $866 million represented United Kingdom
loans. The Company receives management servicing fees ranging from 0.5% to 2.0%
per annum for fixed rate loans and 0.5% to 1.0% per annum for adjustable rate
loans, based upon the outstanding principal balance of loans serviced. The
Company currently services only Company originated or purchased loans.

    The Company has a computer-based loan servicing system that enables it to
provide effective and efficient processing of loans. The system, which is able
to service fixed and adjustable rate loans as well as loans denominated in
dollars or pounds sterling, provides the Company with, among other things,
payment-processing, cashiering, collection and reporting functions.

                                       8

<PAGE> 


    The Company believes its disciplined collection practices contribute to the
relatively low delinquency and loss rates on its servicing portfolio. The
following table illustrates the timeline of the Company's collection practices,
assuming (i) the loan is originated in California, and (ii) a ten-day grace
period applies by contract or under applicable law:



               TIME (1)                                       EVENT
     ------------------------------             --------------------------------

     1st day of the month..........             Borrower loan payment due.

     11th day of the month.........             Payment not received is late.

     12th day of the month.........             Notice of past due payment
                                                mailed to borrower.

     20th day of the month.........             Notice of foreclosure mailed
                                                to borrower.

     26th day of the month.........             Final notice mailed to borrower.

     42 days after due date........             File forwarded to foreclosure
                                                department which records notice
                                                of default after 45th day of
                                                delinquency.

     After notice of default or
     similar notice is recorded....             Borrower informed of status and
                                                Company's reinstatement period
                                                dates.

     During the reinstatement
     period........................             Pre-foreclosure property
                                                inspection and valuation
                                                performed.

     End of the reinstatement
     period........................             Notice of trustee's sale
                                                recorded and trustee's sale date
                                                scheduled. Property sold to
                                                third party or acquired on
                                                behalf of the Company or a 
                                                securitization trust.

    (1)  In other states and the United Kingdom, the Company's collection
         procedures described above may occur sooner or later depending upon
         applicable foreclosure regulations.

    The borrower is contacted by telephone prior to recording the notice of
default to inform the borrower of the situation. If the borrower does not bring
the loan current within the reinstatement period, a notice of sale is published
and a trustee's sale date is scheduled. During this period of time, the Company
performs a pre-foreclosure inspection and valuation of the property to determine
whether changes in the value of the property have occurred since the date of
origination. If the loan is not reinstated, the property is either sold to a
third party at the trustee's sale or acquired on behalf of the Company. The
Company forecloses as quickly as state regulations allow. The Company contracts
on a nationwide basis with several independent foreclosure service companies to
facilitate the foreclosure process for properties located outside California.
For loans originated within California, the Company performs all foreclosure
procedures internally. Properties acquired by the Company are managed with the
objective of immediate disposal.

    The Company's loan servicing software also allows the Company to track and
maintain impound accounts and hazard and flood insurance information. Periodic
expiration reports list all policies scheduled to expire within 30 days. When
policies lapse, a letter is issued advising the borrower of the lapse and that
the Company will obtain force placed insurance at the borrower's expense.
Additionally, the Company maintains a blanket insurance policy that provides
fire insurance coverage for the Company in the event that the Company fails to
obtain force placed insurance in a timely manner upon expiration of the
homeowner's policy.

    Regulation and practices regarding the foreclosure of properties and the
rights of the borrower in default vary greatly from jurisdiction to
jurisdiction. Loans originated by the Company are secured by mortgages, deeds of
trust, trust deeds, security deeds or deeds to secure debt, depending upon the
prevailing practice in the state in which the property securing the loan is
located. Depending on local law, foreclosure is effected by judicial action
and/or non-judicial sale, and is subject to various notice and filing
requirements. If foreclosure if effected by judicial action, the foreclosure
proceedings may take several months.

    In general, the borrower, or any person having a junior encumbrance on the
real estate, may cure a monetary default by paying the entire amount in arrears
plus other costs and expenses incurred in enforcing the obligation during a
statutorily prescribed reinstatement period.

                                       9

<PAGE>


    There are a number of restrictions that may limit the Company's ability to
foreclose on a property. A lender may not foreclose on the property securing a
junior mortgage loan unless it forecloses subject to each senior mortgage.
Moreover, if a borrower has filed for bankruptcy protection, a lender may be
stayed from exercising its foreclosure rights. Also, certain states provide a
homestead exemption that may restrict the ability of a lender to foreclose on
residential property. In such states, the Company requires the borrower to waive
his or her right of homestead as a requirement of the loan. Such waivers of
homestead rights may not be enforceable in certain states.

    Although foreclosure sales are typically public sales, frequently no third
party purchaser bids in excess of the amount of the lender's lien. Such a lack
of bidding is due to several factors, including the possible deterioration of
the property during foreclosure proceedings and the requirement that the
purchaser pay for the property in cash or by cashier's check. Thus, the
foreclosing lender often purchases the property from the trustee and
subsequently re-markets the property. Depending upon market conditions, the
proceeds of the subsequent resale by the Company may not be adequate to cover
the investment in the loan.


CURRENT MARKETS AND EXPANSION PLANS

    CURRENT MARKETS

    The Company originates loans through 32 retail branch offices located
throughout the United States. The Company believes that originating loans
through an extensive retail branch office network not only results in the most
profitable loan origination strategy due to the significant level of loan
origination fees earned by the Company, but also results in low delinquencies
and losses due to the Company's conservative underwriting criteria.

    Although the Company is licensed to originate loans in 18 states, the
District of Columbia and the United Kingdom, its business has historically been
concentrated in California. While this concentration has declined, California
remains a significant part of the Company's business and contributed 26% of the
Company's total loan originations and purchases for 1998. Expansion outside
California began in late 1994. The number of retail branch offices within
California has declined from a historical high of eleven in 1992 to eight as of
December 31, 1998.

    The following table shows the geographic distribution of the Company's loan
originations and purchases for the years ended December 31:

                                        1996          1997          1998
                                       ------        ------        ------
    United States:
        California..............          38%           21%           26%
        New York................           3            13            10
        Illinois................          14            11             8
        New Jersey..............           3             9            12
        Washington..............          11             7             4
        Oregon..................           6             5             4
        Florida.................           7             4             2
        Colorado................           4             4             3
        Others states...........          13            20            23
    United Kingdom..............           1             6             8
                                       ======        ======        ======
          Total.................         100%          100%          100%
                                       ======        ======        ======


    NATIONAL GEOGRAPHIC EXPANSION

    The Company intends to continue to expand its existing retail branch office
network. The Company's expansion strategy involves (i) identifying areas with
demographic statistics comparable to existing markets in which the Company has
been successful in originating loans, (ii) understanding each new market's
regulatory requirements and tailoring the Company's loan programs and practices
to comply with such requirements, and (iii) identifying and training branch
managers and loan officers for each new retail branch office.

                                       10

<PAGE> 


    The Company believes that its products and services are best suited for
those housing markets with home values near the nation's averages. After
identifying a potential new market, the Company contracts with regional or
national companies to gather publicly available information with respect to that
market and to integrate such information with the Company's proprietary
marketing methodology. The Company produces a list of Homeowners whom the
Company believes, based on its historic customer profile, are likely to utilize
the Company's products and services and satisfy the Company's underwriting
guidelines. The Company then focuses its marketing efforts on these Homeowners
in each new market.

    The Company has generally entered into short-term leases for its retail
branch offices. Additionally, the Company generally recruits and hires the
personnel required to staff its retail branch offices from the area near the new
market. Branch managers of new retail branch offices are generally branch
managers of existing retail offices or loan officers promoted from existing
retail branch offices.

    The Company's retail branch office expansion strategy is dependent upon the
Company's ability to obtain new and renew state lending licenses.


COMPETITION

    As a consumer finance company, the Company is subject to intense
competition. Traditional competitors in the financial services business include
other mortgage banking companies, mortgage brokers, commercial banks, credit
unions, thrift institutions, credit card issuers and finance companies. Many of
these competitors in the consumer finance business are substantially larger and
have considerably greater financial, technical and marketing resources than the
Company. Competition can take many forms including convenience in obtaining a
loan, customer service, marketing and distribution channels, amount of the loan,
loan origination fees and interest rates.

    The Company believes that its 1998 record has proven that it is able to
compete on the basis of providing prompt and responsive service, consistent
underwriting and competitive loan programs to borrowers whose needs are not met
by conventional lending institutions.


REGULATION

    The Company's business is subject to extensive regulation at both the
federal and state level. Regulated matters include loan origination, credit
activities, maximum interest rates and finance and other charges, disclosure to
customers, terms of secured transactions, the collection, repossession and
claims handling procedures utilized by the Company, multiple qualification and
licensing requirements for doing business in various jurisdictions and other
trade practices.


    TRUTH IN LENDING

    The Truth in Lending Act ("TILA") and Regulation Z promulgated thereunder
contain certain disclosure requirements designed to provide consumers with
uniform, understandable information with respect to the terms and conditions of
loans and credit transactions in order to give them the ability to compare
credit terms. TILA also guarantees consumers a three day right to cancel certain
credit transactions including loans of the type originated by the Company.
Management of the Company believes that it is in compliance with TILA in all
material respects. If the Company were found not to be in compliance with TILA,
aggrieved borrowers could have the right to rescind their loans and to demand,
among other things, the return of finance charges and fees paid to the Company.

    In September 1994, the Riegle Act was enacted. Among other things, the
Riegle Act makes certain amendments to TILA (the "TILA Amendments"). The TILA
Amendments generally apply to mortgage loans (other than mortgage loans to
finance the acquisition or initial construction of a dwelling) with (i) total
loan origination fees and other fees upon origination in excess of the greater
of eight percent of the total loan amount or a certain dollar amount (currently
$435) or (ii) an annual percentage rate of more than ten percentage points
higher than comparably maturing U.S. Treasury securities ("Covered Loans"). The
Company estimates that substantially all of the loans currently originated and a
portion of the loans purchased by the Company are Covered Loans.

                                       11

<PAGE> 


    The TILA Amendments impose additional disclosure requirements on lenders
originating Covered Loans and prohibits lenders from engaging in a pattern or
practice of originating Covered Loans that are underwritten solely on the basis
of the borrower's home equity without regard to the borrower's ability to repay
the loan. Consistent with its underwriting practices with respect to all loans,
the Company applies to all Covered Loans underwriting criteria that take into
consideration the borrower's ability to repay.

    The TILA Amendments also prohibit lenders from including prepayment fee
clauses in Covered Loans to borrowers with a monthly debt-to-income ratio in
excess of 50% or Covered Loans used to refinance existing loans originated by
the same lender or an affiliate of such lender. The Company reported $4.3
million, $3.5 million and $4.0 million in prepayment fee revenue in fiscal year
1998, 1997 and 1996, respectively. The Company will continue to collect
prepayment fees on loans originated prior to the October 1995 effectiveness of
the TILA Amendments and on non-Covered Loans as well as on Covered Loans in
permitted circumstances. Compliance with the TILA Amendments may cause the level
of prepayment fee revenue to decline in future years. The TILA Amendments impose
other restrictions on Covered Loans, including restrictions on balloon payments
and negative amortization features, which the Company does not believe will have
a material impact on its operations.


    OTHER LENDING LAWS

    The Company is also required to comply with the Equal Credit Opportunity Act
of 1974, as amended ("ECOA"), which prohibits creditors from discriminating
against applicants on certain prohibited bases, including race, color, religion,
national origin, sex, age or marital status. Regulation B promulgated under ECOA
restricts creditors from obtaining certain types of information from loan
applicants. Among other things, it also requires certain disclosures by the
lender regarding consumer rights and requires lenders to advise applicants of
the reasons for any credit denial. In instances where the applicant is denied
credit or the rate or charge for loans increases as a result of information
obtained from a consumer credit agency, another statute, the Fair Credit
Reporting Act of 1970, as amended, requires lenders to supply the applicant with
the name and address of the reporting agency. In addition, the Company is
subject to the Fair Housing Act, which broadly prohibits certain discriminatory
practices in connection with the Company's business. The Company is also subject
to the Real Estate Settlement Procedures Act of 1974, as amended, and
regulations thereunder.

    In addition, the Company is subject to various other federal and state laws,
rules and regulations governing among other things, the licensing of, and
procedures that must be followed by, mortgage lenders and servicers, and
disclosures that must be made to consumer borrowers. Failure to comply with such
laws, as well as with the laws described above, may result in civil and criminal
liability. As a mortgage lender, the Company has been, and expects to continue
to be, subject to regulatory enforcement actions and private causes of action
from time to time with respect to its compliance with applicable laws and
regulations. The Company's lending practices have in the past been and currently
are under regulatory review by various state authorities. Although the Company
utilizes systems and procedures to facilitate compliance with these legal
requirements and believes that it is in compliance in all material respects with
applicable laws, rules and regulations, there can be no assurance that more
restrictive laws, rules and regulations will not be adopted in the future, or
that existing laws and regulations will not be interpreted in a more restrictive
manner, which could make compliance more difficult or expensive.


    INSURANCE REGULATORY LAWS

    As a condition to funding its loans, the Company requires each borrower to
obtain and maintain a policy of insurance providing coverage, at an amount equal
to the greater of the replacement cost or loan amount, for improvements on any
real property securing the borrower's loan. If the borrower fails to provide
such coverage prior to closing of the borrower's loan or if the borrower's
coverage is subsequently canceled or not renewed at any time during the loan
period and the borrower fails to obtain new coverage, the Company will provide
coverage on the borrower's behalf under policies insuring the Company's interest
in the collateral. Such practice is commonly referred to as "forced placement"
of insurance. The Company receives a fee in connection with its placement of
such insurance in California, which activity is not required to be licensed.

                                       12
<PAGE>

    Insurance which is force placed is subject to regulation under TILA, the
National Flood Insurance Act, and state insurance regulatory and lender
statutes. Such laws and regulations generally impose disclosure and notice
requirements which must be satisfied prior to forced placement of coverage,
limitations on the amount of coverage that a lender may obtain to protect its
interest in the collateral, and restrictions on fees and charges that the
Company may assess in connection with such insurance.

    Failure to comply with any of the foregoing federal and state laws and
regulations could result in the imposition of civil penalties on the Company,
class action lawsuits and administrative enforcement actions.


    UNITED KINGDOM REGULATIONS

    The Company's mortgage business in the United Kingdom is subject to
regulations promulgated under the United Kingdom Consumer Credit Act of 1974
(the "CCA") with respect to loans made to individuals or partnerships with
principal balances of (pound)15,000 or less. Loans with principal balances in
excess of (pound)15,000 are not currently regulated within the United Kingdom.
The CCA and regulations promulgated thereunder, among other things, impose
licensing obligations on the Company's United Kingdom subsidiaries, set down
certain requirements relating to the form, content, legibility, execution and
delivery of loan documents, restrict communication with the borrower prior to
completion of a transaction, require information and notice of enforcement to be
given to the borrower, require rebates to the borrower on early settlement and
create a cause of action for "extortionate credit bargains." A license is
required to service loans in the United Kingdom irrespective of the size of the
loan. Failure to comply with the requirements of these rules and regulations can
result in the revocation or suspension of the license to do business and render
the mortgage unenforceable in the absence of a court order. The Company's
operations in the United Kingdom involve loans with principal balances in excess
of (pound)15,000 and are therefore largely unregulated.

    In July 1997 (revised in November 1997) the United Kingdom's Director
General of Fair Trading issued guidelines ("Guidelines") for lenders and brokers
engaged in "non-status" lending activity. These consist of both general
principles and specific guidelines relating to advertising, clarity of
disclosure of loan terms, contract documentation, dealings with borrowers,
selling methods, underwriting and various contract terms which should be
provided and those which are considered unfair. Lenders' attention is drawn to
their responsibility for brokers' and intermediaries' actions and for ensuring
that such parties comply with relevant statutory requirements and the Guidelines
and do not engage in unfair business practices. The Guidelines apply to lending
activity whether regulated under the CCA or not, and thus require dealings in
relation to unregulated lending to be more in line with those in respect of
regulated lending. Failure to comply with these Guidelines could lead to
regulatory action, including the revocation or refusal by the Office of Fair
Trading of CCA licenses, and/or impair the enforceability of certain mortgage
terms.

    The Unfair Terms in Consumer Contracts Regulations 1994 (the "Regulations")
apply generally to contractual dealings with consumers. The Regulations make
unfair terms void and unenforceable against the consumer. Unfair terms are those
which have not been negotiated and which, contrary to good faith, cause a
significant imbalance in the parties' contractual rights and obligations to the
consumer's detriment.


ENVIRONMENTAL MATTERS

    To date, the Company has not been required to perform any investigation or
clean up activities, nor has it been subject to any environmental claims. There
can be no assurance, however, that this will remain the case in the future.

    In the course of its business, the Company, generally on behalf of the REMIC
trusts, has acquired and may acquire in the future properties securing loans
that are in default. Although the Company primarily lends to owners of
residential properties, there is a risk that the Company could be required to
investigate and clean up hazardous or toxic substances or chemical releases at

                                       13
<PAGE>

such properties after acquisition by the Company, and may be held liable to a
governmental entity or to third parties for property damage, personal injury and
investigation and cleanup costs incurred by such parties in connection with the
contamination. In addition, the owner or former owners of a contaminated site
may be subject to common law claims by third parties based on damages and costs
resulting from environmental contamination emanating from such property.


EMPLOYEES

    As of December 31, 1998 the Company had a total of 445 employees. The
Company has 148 employees working at its corporate headquarters. None of the
Company employees is covered by a collective bargaining agreement. The Company
considers its relations with its employees to be good.


ITEM 2.  PROPERTIES

    The Company's corporate headquarters are located at 17305 Von Karman Avenue,
Irvine, California 92614-6203, where the Company leases from a partnership
beneficially owned by Brian and Sarah Chisick approximately 40,000 square feet
of office space. The lease expires on January 31, 2003, and the Company has an
option to renew the lease for five years. The Company also leases office space
for its 32 retail branch offices. The average size of these retail branch
offices is approximately 2,400 square feet, with an annual average base rent of
approximately $40,000. In 1997 the Company purchased an office building in
Irvine, California, with approximately 40,000 square feet of office space, for
use as a telemarketing center and a mail processing center. The Company believes
its facilities are both suitable and adequate for the current business
activities conducted at its corporate headquarters and at its existing retail
branch offices.


ITEM 3.  LEGAL PROCEEDINGS

    In June 1998, Leon Rasachack and Philip A. Ettedgui filed a class action
suit on behalf of all purchasers of the Company's Class A Common Stock between
April 24, 1997 through May 15, 1998. The suit was filed in the Superior Court of
California in the County of Orange against the Company, Brian Chisick, Sarah
Chisick and Mark Mason. The complaint alleges that the Company conspired against
the purchasers of the stock during the class period by failing to disclose known
material adverse conditions in making certain public statements about the
Company's growth prospects for the future. The plaintiffs in this class action
suit are seeking an unspecified amount for damages. The Company is currently in
discovery.

    In September 1998, the Company was informed by the United States Department
of Justice ("DOJ") that it and the Attorneys General of Arizona, Florida,
Illinois, Massachusetts, Minnesota, New York and Washington have initiated a
joint investigation into the lending practices of the Company. That
investigation and any negative findings that may result therefrom could have a
significant adverse effect on the Company's ability to obtain new and renew
state lending licenses, which, in turn, could have a significant adverse effect
on the Company's ability to maintain or expand its retail branch network of
offices and on the Company's results of operations and financial condition. The
DOJ has agreed to limit its initial inquiry to pricing disparities, and is
currently reviewing data provided by the Company.

    In October 1998, the Attorney General of Massachusetts filed an action on
behalf of the Commonwealth against the Company in the Superior Court of
Massachusetts, in the County of Suffolk. The suit seeks to enjoin the Company
from charging rates, points and other terms which significantly deviate from
industry-wide standards or which are otherwise unconscionable or unlawful. The
Attorney General seeks injunctive relief and also seeks restitution for all
consumers, civil penalties, and the costs of investigating and prosecuting the
action, including attorneys' fees. A preliminary injunction was granted,
limiting the points the Company can charge to a total of five. In addition, the
Company must advise the Attorney General before any foreclosure actions are
filed in the Commonwealth.

    In November 1998, the Attorney General of Minnesota filed an action on
behalf of the State against the Company in Ramsey County District Court. The
suit alleges violations of Minnesota Uniform Deceptive Trade Practices Act, the
Consumer Fraud Act, Truth in Lending Act and related federal regulations. The
Attorney General seeks injunctive relief, restitution, civil penalties,
attorneys' fees and costs. A decision on a preliminary injunction limiting the
Company's lending activities in the State is currently pending.


                                       14
<PAGE>

    In December 1998, the Attorney General of the State of Illinois filed an
action on behalf of the State against the Company in the Cook County Circuit
Court. The suit alleges violations of the Illinois Consumer Fraud Act, Deceptive
Trade Practices Act and Illinois Interest Act. The Attorney General seeks
injunctive relief, restitution, civil penalties, rescission, revocation of
business licenses, attorneys' fees and costs. The Company has filed a motion to
dismiss, which should be heard sometime in April 1999.

    In December 1998, the American Association of Retired Persons (AARP) filed
an action against the Company and against Brian and Sarah Chisick in the Santa
Clara County Superior Court. The suit alleges unfair, unlawful, fraudulent and
deceptive business practices and conspiracy. The AARP is seeking injunctive
relief, restitution, revocation of licenses, attorneys' fees and costs. A motion
to strike the allegation of the complaint has been filed.

    The Company is also a party to various legal proceedings arising out of the
ordinary course of its business including 17 lawsuits alleging misleading
lending practices, some of which have been filed either as a class action or
under private attorney general statutes.

    Given the preliminary state of the above legal proceedings, the Company is
currently unable to determine the probability or reasonably estimate any
potential loss, if any, related to the ultimate outcome of the cases.


ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

    No matters were submitted to a vote of the Company's security holders during
the quarter ended December 31, 1998.

                                       15

<PAGE> 


                                     PART II


ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

    In July 1996, the Company's Class A Common Stock began trading under the
symbol FACO on the NASDAQ National Market. The following table sets forth the
range of high and low closing sale prices of the Company's Class A Common Stock
for the periods indicated:


                                                       High       Low
                                                     --------   --------
    1996
     Third Quarter (from July 31, 1996).......        16 5/6     12 7/12
      Fourth Quarter..........................        20 1/3     14 2/3

    1997
     First Quarter............................        20 1/6      15
     Second Quarter...........................        19 1/2      12 1/6
     Third Quarter............................        21 11/12    18 1/6
      Fourth Quarter..........................        23 43/64    15 1/2

    1998
      First Quarter...........................        18 1/2      12 7/8
      Second Quarter..........................        17 3/8       7
      Third Quarter...........................        10 3/8       6
      Fourth Quarter..........................         6 1/4       2 3/8


    No cash dividends were declared during the period covered by the above
table. On October 31, 1997, the Company paid a stock dividend of 1 share for
every 2 shares of Class A and Class B Common Stock held by holders of record on
October 15, 1997. The above sales prices of Class A Common Stock have been
retroactively adjusted to reflect this stock dividend as a stock split. The
Company does not anticipate declaring cash dividends in the near future.

    In July 1998, the Company announced that its majority stockholders, Brian
and Sarah Chisick, converted all of their Class B Common Stock, to which four
votes per share applies in matters requiring a stockholder vote, into Class A
Common Stock, which carries one vote per share.

    On February 1, 1999, the Company had approximately 12 stockholders of record
of its Class A Common Stock. The Company believes its Class A Common Stock is
beneficially held by more than 1,900 stockholders.

                                       16


<PAGE> 

<TABLE>
<CAPTION>

ITEM 6.  SELECTED FINANCIAL DATA

                           FIRST ALLIANCE CORPORATION
                      SELECTED CONSOLIDATED FINANCIAL DATA

                                                                1994 (1)        1995        1996 (2)        1997         1998
                                                               ----------    ----------    ----------    ----------   ----------
                                                                                   (Dollars in thousands)
<S>                                                            <C>           <C>           <C>           <C>          <C>
STATEMENT OF INCOME DATA:
   Gain (loss) on sale of loans............................... $  (1,547)    $   8,982     $  10,965     $  22,644    $  10,699
   Origination fees and other.................................    29,449        26,484        37,206        44,034       44,252
   Servicing and other fees revenue...........................     9,106         8,614         8,854         7,544        3,930
   Interest revenue...........................................     8,650        14,624        13,562        21,397       21,754
   Total revenue..............................................    45,802        58,880        70,871        95,649       83,808
   Interest expense...........................................     3,744         4,167         2,655         3,164        8,382
   Non-interest expense (3)...................................    26,824        23,693        29,977        39,840       52,473
   Income before income tax provision.........................    15,234        31,020        38,239        52,645       22,953
   Net income.................................................    14,871        30,542        32,139        32,772       14,216
   Basic net income per share.................................      0.93          1.91          1.72          1.50         0.73
   Diluted net income per share...............................      0.93          1.91          1.72          1.49         0.73
   Pro forma net income (4)...................................     8,988        18,302        22,561                      
   Pro forma diluted net income per share (4)..... ...........      0.41          0.83          1.02                      
   Income before income tax provision as a % of revenue.......      33.3%         52.7%         54.0%         55.0%          27%
   Dividends declared (5) .................................... $  17,341     $  12,205     $  60,080                      
STATEMENT OF FINANCIAL CONDITION DATA:
   Cash and cash equivalents ................................. $   5,298     $   4,019     $  27,414     $  14,032    $  18,052
   Loans held for sale .......................................    18,676        24,744        11,023        54,872       24,421
   Loans receivable held for investment (6)...................     2,521         2,261         2,432         2,082       57,667
   Residual interests.........................................    11,645        19,705        29,253        50,238       48,720
   Total assets...............................................    48,266        66,911        87,457       158,147      177,603
   Total borrowings...........................................    14,839        19,356           131        57,767       88,818
   Stockholders' equity ......................................    23,984        42,321        77,978        91,277       74,587
OTHER DATA:
   Loan originations and purchases:
     Retail originations...................................... $ 221,839    $  216,566     $ 291,807     $ 398,359    $ 458,788
     Wholesale purchases......................................    91,826        24,078        32,681       130,151       74,805
                                                               ----------    ----------    ----------    ----------   ----------
         Total ............................................... $ 313,665    $  240,644     $ 324,488     $ 528,510    $ 533,593
                                                               ==========   ===========    ==========    ==========   ==========
   Average retail origination loan size....................... $      66    $       69     $      83     $      88    $      94
   Number of retail branches..................................        13            17            23            33           32
   Weighted average interest rate on loan originations               8.7%         10.3%          9.6%          9.5%         9.3%
    and purchases.............................................
   Weighted average initial combined loan-to-value ratio......      56.2%         59.3%         62.2%         62.5%        65.3%
   Loan sales:
    Securitizations........................................... $ 350,331    $  167,974     $ 267,661     $ 339,005    $ 430,003
    Whole loan sales..........................................    22,857        65,251        71,864       144,633      154,111
                                                               ----------    ----------    ----------    ----------   ----------
        Total ................................................ $ 373,188    $  233,225     $ 339,525     $ 483,638    $ 584,114
                                                               ==========   ===========    ==========    ==========   ==========
   Servicing portfolio ....................................... $ 555,685    $  613,791     $ 641,191     $ 799,085    $ 865,663
    Total delinquencies as a % of the servicing portfolio.....       4.3%          5.8%          5.5%          4.1%         4.8%
    Real estate owned as a % of the servicing portfolio.......       0.6%          1.3%          0.6%          0.2%         0.2%
   Losses on real estate owned as a % of the average
     servicing portfolio during the period....................      0.01%         0.03%         0.35%         0.24%        0.12%
</TABLE>


(1)  The Company typically securitizes or sells most of its loan originations
     and purchases within each year. At the end of 1993, the Company had $74
     million of loans held for sale resulting in increased assets and increased
     borrowings on the warehouse financing facilities. These loans were sold in
     1994 resulting in an increase in the ratio of loan sales to loan
     originations and purchases in 1994 as compared to other years.
(2)  During 1996, the Company completed the IPO whereby 6,037,500 shares of
     Class A Common Stock were issued and the Company changed its tax status
     from that of an S corporation to that of a C corporation. The Company
     received $63 million of net proceeds from the IPO, of which $45 million was
     used to pay the S distribution notes.
(3)  During 1994,  the Company incurred legal expenses and settlement costs of
     $7 million  related to litigation  initiated in December 1989.
(4)  Pro forma amounts reflect adjustments for federal and state income taxes as
     if the Company had been taxed as a C corporation rather than an S
     corporation. The Company ceased to be an S corporation concurrent with the
     IPO in July 1996.
(5)  Included in dividends in 1996 is $45 million of S distribution dividends
     made in the form of the S distribution notes. Historical dividends include
     dividends used by the stockholders to pay income taxes on the Company's S
     corporation earnings and are not indicative of the Company's present
     dividend policy.
(6)  During 1998, the Company discontinued its United Kingdom loan originations.
     Accordingly, the Company has reclassified approximately $57 million of such
     loans from loans held for sale to loans receivable held for investment at
     December 31, 1998.

                                       17

<PAGE> 


ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATION

GENERAL

    The Company is a financial services organization principally engaged in
mortgage loan origination, purchases, sales and servicing. Loans originated by
the Company primarily consist of fixed and adjustable rate loans secured by
first mortgages on single family residences. The Company originates loans
through its retail branch network which is currently comprised of 32 offices in
the United States (eight of which are located in California, four of which are
located in New York, three of which are located in Ohio, two of which are
located in each of Illinois, Maryland, New Jersey and Pennsylvania, and one of
which is located in each of Arizona, Colorado, Florida, Georgia, Minnesota,
Oregon, Utah, Virginia and Washington). In addition, the Company purchases loans
from qualified mortgage originators. The Company either securitizes the loans in
a trust or sells the loans to wholesale purchasers. A significant portion of the
Company's loan production is securitized with the Company retaining the right to
service the loans.

    In October 1997, the Board of Directors authorized a three-for-two split of
its common stock to be effected in the form of a stock dividend. The stock
dividend was distributed on October 31, 1997. All share and per share
information have been restated to reflect the stock dividend.

    During the third quarter of 1996, FACO completed an initial public offering
(the "IPO") whereby 6,037,500 shares of its Class A Common Stock were sold to
the public. Concurrently, 16,125,000 shares of the Class B Common Stock of FACO
were issued in exchange for all of the issued and outstanding shares of FAMCO as
part of a reorganization whereby FAMCO became a wholly owned subsidiary of FACO.
By July 1998, all issued and outstanding Class B Common Stock of FACO was
converted on a one for one basis to Class A Common Stock. The consolidated
financial condition and results of operations of the Company for periods prior
to the date of the reorganization and IPO substantially consist of those of
FAMCO.

    Prior to 1992, the Company sold its loans to private investors on a
servicing retained basis. Since that time, the Company has sold the majority of
its loans in the secondary market primarily through securitization and, to a
lesser extent, through whole loan sales in which the Company does not retain the
right to service the loans. The Company's underwriting guidelines require
threshold credit criteria and combined LTV limits for loans sold through
securitizations. Accordingly, the Company sells on a servicing released basis
those loans which do not meet its risk criteria for securitization. The Company
retains the right to service loans which it has securitized.

    The Company's strategy of originating, as compared to purchasing, the
majority of its loan volume results in the generation of a significant amount of
loan origination fees. This income has allowed the Company to generate positive
operating cash flow. There can be no assurance, however, that the Company's
operating cash flow will continue to be positive in the future.


CERTAIN ACCOUNTING CONSIDERATIONS

    As a fundamental part of its business and financing strategy, the Company
securitizes the majority of its loans in trusts whereby the loans are exchanged
for regular and residual interests in the trusts. A significant portion of the
Company's income is associated with securitization activity.

    Gains on servicing released whole loan sales equal the difference between
the net proceeds to the Company from such sales and the loans' acquisition cost
(for purchased loans) or net carrying value (for originated loans). The net
carrying value of originated loans is equal to their principal balance less net
deferred origination fees.

                                       18

<PAGE> 


    Gains on servicing retained sales of loans through securitization represent
the difference between the net proceeds to the Company in the securitization and
the allocated cost of loans securitized. In accordance with Statement of
Financial Accounting Standards ("SFAS") No. 125, the allocated cost of the loans
securitized is determined by allocating their acquisition cost (for purchased
loans) or net carrying value (for originated loans) between the loans
securitized, the residual interests and the mortgage servicing rights retained
by the Company based upon their relative fair values. At origination, the
Company classifies the residual interests as trading securities, which are
recorded at fair value. The difference between the fair value of residual
interest certificates and their allocated cost is recorded as gain on
securitization and is included in loan origination and sale revenue.

    In a securitization, the Company exchanges loans for regular interest
certificates and a residual interest certificates in a trust. The regular
interest certificates are immediately sold by the Company to the public for
cash. As the holder of the residual interest certificates, the Company is
entitled to receive certain excess cash flows. These excess cash flows are the
difference between (a) principal and interest paid by borrowers and (b) the sum
of (i) scheduled principal and interest paid to holders of the regular interest
certificates, (ii) trustee fees, (iii) third-party credit enhancement fees, (iv)
servicing fees, and (v) loan losses. The Company begins receiving these excess
cash flows after certain overcollateralization requirements, which are specific
to each securitization and are used as a means of credit enhancement, have been
met.

    The Company records residual interest certificates at fair value. As such,
the carrying value of these securities is impacted by changes in market interest
rates and prepayment and loss experiences of these and similar securities. The
Company determines the fair value of the residual interest certificates
utilizing prepayment, credit loss and other assumptions appropriate for each
particular securitization consistent with those an unrelated third party would
utilize to value such securities. To the Company's knowledge, there is no active
market for the sale of these residual interest certificates. The range of values
attributable to the factors used in determining fair value is broad.
Accordingly, the Company's estimate of fair value is inherently subjective.
Prepayments are expressed through a market convention known as an annual
constant prepayment rate ("CPR"). See Note 1 of the audited financial statements
for the residual interest assumptions utilized by the Company during 1998 and
1997.

    As of December 31, 1998, the Company's investments in residual interests
totaled $48.7 million.

    To determine the fair value of mortgage servicing rights, the Company
computes the present value of projected net cash flows expected to be received
over the life of the loans. Such projections incorporate assumptions, including
servicing costs, prepayment rates and discount rates, consistent with those an
unrelated third party would utilize to value such mortgage servicing rights.
These assumptions are similar to those used by the Company to value residual
interests. The Company periodically evaluates capitalized mortgage servicing
rights for impairment, which is measured as the excess of unamortized cost over
fair value. This review is performed on a disaggregated basis by loan type. The
Company has generally found that non-conforming borrowers are payment sensitive
rather than interest rate sensitive. Therefore, the Company does not consider
interest rates a predominant risk characteristic for purposes of evaluating
impairment. As of December 31, 1998, mortgage servicing rights totaled $10.0
million.

    The three primary components of the Company's revenue are loan origination
and sale, loan servicing and other fees and interest and other income.

    Loan origination and sale revenue consists of gain on sale of loans and the
recognition of net deferred origination fees. A significant portion of loan
origination and sale revenue is the recognition upon sale of net deferred
origination fees, which equaled $44.3 million, or 81% of loan origination and
sale revenue, during 1998.

    Loan servicing and other fees represent management servicing fees and other
ancillary fees, including prepayment penalties, received from servicing loans.
Mortgage servicing rights are amortized against loan servicing and other fee
revenue over the period of estimated net future servicing fee income.

    Interest and other income is primarily comprised of three components: (i)
interest on loans held for sale during the warehousing period and loans
receivable held for investment, (ii) interest on residual interests, and (iii)
income derived from the Company's credit card operations.

                                       19

<PAGE> 

<TABLE>
<CAPTION>

LOAN ORIGINATION AND PURCHASES

                                                                                   FOR THE YEARS ENDED DECEMBER 31,
                                                                                --------------------------------------
                                                                                   1996          1997          1998
                                                                                ----------    ----------    ----------
                                                                                        (Dollars in thousands)
    <S>                                                                         <C>           <C>           <C>
    Loan originations and purchases:
        Retail originations........................................             $ 291,807     $ 398,359     $ 458,788
        Wholesale purchases........................................                32,681       130,151        74,805
                                                                                ----------     ----------   ----------
             Total originations and purchases......................             $ 324,488     $ 528,510     $ 533,593
                                                                                ==========    ==========    ==========

    Number of retail branches as of the end of the period:
        United States:
          California ..............................................                     7             7             8
          Other States.............................................                    15            22            24
        United Kingdom.............................................                     1             4             0
                                                                                ----------     ----------   ----------
             Total ................................................                    23            33            32
                                                                                ==========    ==========    ==========

    Weighted average initial interest rate.........................                   9.6%          9.5%         9.3%
    Weighted average initial combined loan-to-value ratio..........                  62.2%         62.5%        65.3%
    Weighted average loan origination and processing fees
        as a percent of retail originations........................                  14.2%         14.8%        13.5%
    Average retail origination loan size...........................             $      83     $      88     $     94
</TABLE>


    Total originations and purchases increased 1% in 1998 and 63% in 1997.
Retail originations increased 15% in 1998 and 37% in 1997, primarily as a result
of new retail branch offices opened in 1998, 1997 and 1996. Wholesale purchases
decreased 43% in 1998 and increased 298% in 1997. The decrease in 1998 and
increase in 1997 was primarily related to the implementation of the Company's
low LTV purchase program in 1997, which was subsequently discontinued in 1998.
Purchases related to such program totaled $24 million and $61 million in 1998
and 1997, respectively.


LOAN SALES
<TABLE>
<CAPTION>
                                                                                  FOR THE YEARS ENDED DECEMBER 31,
                                                                                --------------------------------------
                                                                                   1996          1997          1998
                                                                                ----------    ----------    ----------
                                                                                        (Dollars in thousands)
    <S>                                                                         <C>           <C>           <C>
    Securitizations................................................             $ 267,661     $ 339,005     $ 430,003
    Whole loan sales  .............................................                71,864       144,633       154,111
                                                                                ----------    ----------    ----------
        Total .....................................................             $ 339,525     $ 483,638     $ 584,114
                                                                                ==========    ==========    ==========
</TABLE>


    Loan sales, including securitizations, increased 21% in 1998 and 42% in
1997, primarily due to an increase in originations and purchases.

                                       20


<PAGE> 


COMPOSITION OF REVENUE AND EXPENSE

    The following table summarizes certain components of the Company's
consolidated statements of income set forth as a percentage of total revenue for
the years ended December 31:
<TABLE>
<CAPTION>

                                                                                   1996          1997          1998
                                                                                ----------    ----------    ----------
    <S>                                                                         <C>           <C>           <C>
    REVENUE:
         Loan origination and sale:
           Gain (loss) on sale of loans............................                  15.5%         23.7%         12.8%
           Net loan origination and other fees.....................                  52.5          46.0          52.8
         Loan servicing and other fees.............................                  12.5           7.9           4.7
         Interest and other........................................                  19.5          22.4          29.7
                                                                                ----------    ----------    ----------
           Total revenue...........................................                 100.0         100.0         100.0
                                                                                ----------    ----------    ----------
    EXPENSE:
         Compensation and benefits.................................                  21.9          20.2          27.3
         Advertising ..............................................                   5.9           6.4          11.2
         Professional services and other fees......................                   2.7           3.3           5.7
         Facilities and insurance..................................                   3.5           3.5           5.2
         Supplies..................................................                   2.2           2.5           3.0
         Depreciation and amortization.............................                   1.2           1.0           2.6
         Interest..................................................                   3.7           3.3          10.0
         Legal ....................................................                   1.3           2.1           4.6
         Travel and training.......................................                   1.6           1.8           1.8
         Other ....................................................                   2.0           0.9           1.2
                                                                                ----------    ----------    ----------
           Total expense...........................................                  46.0          45.0          72.6
                                                                                ----------    ----------    ----------
    Income before income tax provision.............................                  54.0          55.0          27.4
    Income tax provision (1).......................................                   8.7          20.7          10.4
                                                                                ==========    ==========    ==========
    Net income ....................................................                  45.3%         34.3%         17.0%
                                                                                ==========    ==========    ==========
</TABLE>


(1)  During 1996, the Company completed the IPO and the Company changed its tax
     status from that of an S corporation to that of a C corporation.


RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 1998

    REVENUE

    The following table sets forth the components of the Company's revenue for
the years ended December 31:
<TABLE>
<CAPTION>

                                                                                   1996          1997          1998
                                                                                ----------    ----------    ----------
                                                                                        (Dollars in thousands)
    <S>                                                                         <C>           <C>           <C>
    Loan origination and sale:
         Gain on sale of loans (1).................................             $  10,965     $  22,644     $  10,699
         Net loan origination and other fees.......................                37,206        44,034        44,252
    Loan servicing and other fees..................................                 8,854         7,544         3,930
    Interest and other.............................................                13,846        21,427        24,927
                                                                                ----------    ----------    ----------
         Total revenue.............................................             $  70,871     $  95,649     $  83,808
                                                                                ==========    ==========    ==========
</TABLE>

    (1) Excluding net loan origination and other fees.

    Total revenues decreased 12% or $11.8 million in 1998 and increased 35% or
$24.8 million in 1997. The decrease in 1998 was primarily due to lower loan
origination and sale revenue and loan servicing and other fees, which was offset
by increased interest and other income. The increase in 1997, however, was
primarily due to higher loan origination and sales revenue and interest income.


                                       21

<PAGE>

    Loan origination and sale revenue decreased 18% or $11.7 million in 1998 and
increased 38% or $18.5 million in 1997.

    Gain on sale of loans decreased $11.9 million or 53% in 1998 as compared to
1997. This decrease is primarily attributable to a $5.0 million write down of
residual interest, and a reduction of gain on sale related to whole loan sales
and securitizations of approximately $3.8 million. Additionally, during 1997 the
Company recognized as gain approximately $3.1 million related to an increase in
the fair value of residual interest.

    The write down during 1998 was the result of an increase in the Company's
prepayment rates primarily related to its adjustable rate loans. In addition,
gain on sale as a percent of loans sold decreased to 1.8% in 1998 from 4.7% in
1997. Gain on sale related to whole loan sales decreased by $3.1 million during
1998 as compared to 1997. Gain on sale as a percent of whole loan sales
decreased to 1.1% during 1998 from 3.3% in 1997 resulting from a reduction in
premiums available in the secondary market for the Company's loans. Gain on sale
related to securitizations decreased $0.7 million during 1998 as compared to
1997. Gain on sale as a percent of securitized loans decreased to 3.3% during
1998 from 4.3% during 1997. Such was primarily the result of increased
prepayment rates experienced by the Company during 1998. Consequently, the
Company increased the weighted average constant prepayment rate assumption for
its adjustable rate loans from 35% during 1997 to 40% during 1998.

    Gain on sale of loans increased $11.7 million in 1997 as compared to 1996
due to a 42% increase in the volume of loans sold, an increase in gain on sale
as a percent of loans sold and $3.1 million recognized in 1997 as an increase in
the fair value of residual interest certificates. Gain on sale as a percentage
of loans sold increased to 4.7% in 1997 from 3.2% in 1996. Gain on sale as a
percent of loans securitized increased to 4.3% in 1997 from 3.5% in 1996. This
increase is primarily due to an increase in the weighted average initial
interest rate spread and a decrease in the discount rate used in computing the
fair value of the residual interest certificates and mortgage servicing rights.
The weighted average initial interest rate spread (the difference between the
initial weighted average loan interest rates for the loans included in the
securitization and the initial weighted average pass-through rate paid to the
holders of the regular interest certificates in the securitization) in residual
interest certificates originated increased to 3.1% in 1997 from 2.9% in 1996. A
discount rate of 15% was used to value residual interest certificates and
mortgage servicing rights in 1997 as compared to a rate of 18% used in 1996. In
addition, the weighted average gain on whole loan sales increased to 3.3% of
loans sold in 1997 as compared to 2.0% in 1996, due primarily to increased
premiums available in the secondary market.

    Despite a 14% increase in retail loan sales during 1998, net loan
origination and other fees remained consistent with the 1997 levels. Net loan
origination and other fees did not increase in the same proportion as the
increase in retail loan sales primarily due to a decrease in the average gross
fees recognized from 14.8% during 1997 to 13.5% during 1998. The 18% increase of
$6.8 million in net loan origination and other fees in 1997 as compared to 1996
is the direct result of a 21% increase in retail loan sales during 1997.

    Loan servicing and other fees decreased $3.6 million or 48% in 1998 and $1.3
million or 15% in 1997. The decrease in both years was primarily attributable to
an increase in the amortization of mortgage servicing rights. Amortization of
mortgage servicing rights increased by $2.9 million and $1.0 million in 1998 and
1997, respectively. The increase during 1998 and 1997 was primarily due to an
increase in the average balance of mortgage servicing rights outstanding as
compared to the prior years. Additionally, during 1998, the Company accelerated
the amortization of mortgage servicing rights by approximately $1.3 million as a
result of higher than expected prepayments. Excluding amortization of mortgage
servicing rights, loan servicing and other fees during 1998 and 1997 remained
consistent with the prior year despite an increase in the average servicing
portfolio. This can primarily be attributed to the composition of the Company's
servicing portfolio when compared to the prior years. The Company earns higher
management servicing fees on loans serviced for private investors and for
securitizations consummated prior to 1996. As the proportion of loans serviced
for this group of loans decreases in relation to the portfolio balance, so does
the related servicing income.

    Interest and other income increased $3.5 million or 16% in 1998 as compared
to 1997. This increase was primarily related to a $4.0 million increase in
interest derived from loans held for sale and loans receivable held for
investment and a $2.8 million increase in other income from the Company's credit
card operations, which commenced operation in the fourth quarter of 1997. Such
increases were offset by a $3.7 million decrease in interest income from
residual interest certificates . The increase in interest from loans held for
sale was a direct result of an increase in the average balance of loans held for
sale when compared to the prior year, primarily due to a growing United Kingdom
portfolio.


                                       22

<PAGE>

    Interest income increased $7.8 million, or 55%, in 1997 as compared to 1996.
The increase in interest income was due to a $3.6 million increase in interest
income from loans held for sale, a $2.6 million increase in interest income from
residual interest certificates, and a $1.4 million increase in interest income
from short-term investments. The increases in interest income from loans held
for sale and residual interest certificates were primarily due to increases in
the average balances of loans held for sale and residual interest certificates
during 1997 as compared to 1996. The increases in interest income from
short-term investments were primarily attributable in increases in the balance
of available cash as a result of the IPO and cash generated from operations.


    EXPENSE

    The following table sets forth the components of the Company's expenses for
the years ended December 31:
<TABLE>
<CAPTION>

                                                                                   1996          1997          1998
                                                                                ----------    ----------    ----------
                                                                                        (Dollars in thousands)
    <S>                                                                         <C>           <C>           <C>
    Compensation and benefits......................................             $  15,488     $  19,341     $  22,857
    Advertising....................................................                 4,191         6,099         9,357
    Professional services and other fees...........................                 1,946         3,196         4,762
    Facilities and insurance.......................................                 2,511         3,362         4,332
    Supplies.......................................................                 1,575         2,416         2,498
    Depreciation and amortization..................................                   838           924         2,157
    Interest.......................................................                 2,655         3,164         8,382
    Legal..........................................................                   917         2,009         3,851
    Travel and training............................................                 1,163         1,710         1,521
    Other .........................................................                 1,348           783         1,138
                                                                                ----------    ----------    ----------
        Total expense..............................................             $  32,632     $  43,004     $  60,855
                                                                                ==========    ==========    ==========
</TABLE>


    Total expenses increased 42% or $17.9 million and 32% or $10.4 million in
1998 and 1997, respectively, primarily due to increases in expenses related to
the Company's ongoing retail branch expansion and credit card operations (the
credit card operations was discontinued in December 1998).

    The increase in compensation and benefits of 18% or $3.5 million and 25% or
$3.9 million in 1998 and 1997, respectively, was primarily due to increased
personnel to support the Company's retail branch expansion and in 1998, the
Company's credit card operations.

    The increase in advertising of 53% or $3.3 million and 46% or $1.9 million
in 1998 and 1997, respectively, was primarily due to an increase in marketing
activity, including purchases of marketing databases associated with the
Company's retail branch expansion and in 1998, the Company's credit card
operations.

    Professional services and other fees increased 49% or $1.6 million in 1998
as compared to 1997 primarily due to costs incurred under the Company's credit
card operations and costs associated with the discontinuance of the Company's
United Kingdom operations. Professional services and other fees increased 64% or
$1.2 million in 1997 as compared to 1996, primarily due to recruiting and other
costs associated with the Company's retail branch expansion.

    Depreciation and amortization increased $1.2 million in 1998 as compared to
1997, primarily due to accelerated depreciation of property related to the
discontinuation of the United Kingdom operations, an increase in the average
balance of fixed assets due to the Company's continued retail branch expansion,
credit card operations, and the newly centralized telemarketing facility in
Irvine, California

    Combined, facilities and insurance, supplies, and travel and training
increased 12% and 43% in 1998 and 1997, respectively, primarily due to the
Company's continuing retail branch expansion including costs related to the
Company's new centralized telemarketing facility in Irvine, California.

                                       23
<PAGE>

    Interest expense increased 165% or $5.2 million in 1998 as compared to 1997
primarily due to an increase in interest expense related to the Company's
warehouse financing facility. This increase was the result of a 131% increase in
the average balance of loans warehoused in 1998 as compared to 1997.
Additionally, the weighted average interest rate on the warehouse financing
facility increased in 1998. The increase in the weighted average interest rate
is due to an increase in the proportion of United Kingdom loans, which carry a
higher cost of funds, warehoused during 1998 as compared to 1997.

    Interest expense increased $0.5 million in 1997 as compared to 1996 due
primarily to an increase in interest expense on the warehouse financing facility
of $1.2 million. The increase in interest expense on the warehouse financing
facility is the result of a 53% increase in the average balance outstanding on
the warehouse line when compared to the prior year. In addition, during 1996,
the Company paid interest on S distribution notes of $0.6 million. No such notes
were outstanding during 1997.

    Legal expense increased 92% or $1.8 million in 1998 as compared to 1997 as a
result of increased litigation and costs related to the discontinuation of the
United Kingdom origination operations.

    Legal expense increased $1.1 million in 1997 as compared to 1996 primarily
due to legal costs incurred in resolving outstanding corporate litigation
matters.


INCOME TAXES

    From May 1, 1988 until the close of the IPO, the Company had elected to be
treated for Federal income and certain state tax purposes as an S corporation
under Subchapter S of the Internal Revenue Code and comparable state laws. As a
result, the Company's provisions for income taxes during that period reflected
modest corporate level state income taxes for those states in which the Company
operates. The taxable income of the Company during such periods has been
included in the individual taxable income of its stockholders for Federal and
state income tax purposes.

    The Company's S corporation status was terminated in July 1996 and the
Company became subject to full corporate Federal income and certain state income
taxes. In conjunction with the termination of the Company's S corporation
status, the Company recorded $3.1 million of net deferred tax assets related to
temporary differences between financial reporting and tax basis of assets and
liabilities measured by applying enacted tax rates and law to taxable years in
which such temporary differences are expected to be recovered or settled. Since
the IPO, the Company's effective income tax rate has approximated the Federal
and composite state income tax rates (net of Federal benefit). If the Company
had been fully subject to Federal and state income taxes, net income on a pro
forma basis would have been $22.6 million in 1996.

    The Company's actual tax rates for 1998 and 1997 were 38.06% and 37.75%,
respectively.

    During the first two quarters of 1998, the Company began securitizing its
loans in the form of owners' trusts. By utilizing this securitization structure,
the Company's securitization of loans were treated as a borrowing for State and
Federal tax purposes rather than as a sale. In the third and fourth quarters of
1998, however, the Company decided to securitize its loans in the form of a real
estate mortgage investment conduit ("REMIC"), under which the securitization of
loans will be treated as a sale for State and Federal tax purposes.


                                       24

<PAGE> 

<TABLE>
<CAPTION>

SERVICING

    The following tables provide data on loan delinquency, REO and net losses
for the Company's servicing portfolio:

UNITED STATES                                                                   AS OF DECEMBER 31,
                                                ------------------------------------------------------------------------------------
                                                             1996                       1997                       1998
                                                ---------------------------- --------------------------- ---------------------------
                                                                  % of                        % of                        % of
                                                  (Dollars in    Servicing    (Dollars in   Servicing    (Dollars in    Servicing
                                                  Thousands)     Portfolio    Thousands)    Portfolio     Thousands)    Portfolio
                                                -------------  ------------- ------------- ------------- ------------- -------------
<S>                                             <C>                     <C>  <C>                    <C>  <C>                  <C>
Servicing portfolio.....................        $    637,903                 $    769,733                $    802,034
                                                =============                =============               =============
30-59 days delinquent...................        $      9,360            1.5% $      7,719           1.0% $      9,144          1.1%
60-89 days delinquent...................               6,704            1.0%        7,520           1.0%        6,097          0.8%
90 days or more delinquent..............              19,081            3.0%       16,935           2.2%       18,449          2.3%
                                                =============  ============= ============= ============= ============= =============
   Total delinquencies..................        $     35,145            5.5% $     32,174           4.2% $     33,690          4.2%
                                                =============  ============= ============= ============= ============= =============
REO (1)                                         $      3,951            0.6% $      1,688           0.2% $      2,063          0.2%
                                                =============  ============= ============= ============= ============= =============

UNITED KINGDOM                                                                  AS OF DECEMBER 31,
                                                ------------------------------------------------------------------------------------
                                                          1996                       1997                        1998
                                                ---------------------------- --------------------------- ---------------------------
                                                                  % of                        % of                        % of
                                                  (Dollars in    Servicing    (Dollars in   Servicing    (Dollars in    Servicing
                                                  Thousands)     Portfolio    Thousands)    Portfolio     Thousands)    Portfolio
                                                -------------  ------------- ------------- ------------- ------------- -------------
Servicing portfolio.....................        $      3,288                 $     29,352                $     63,629
                                                =============                =============               =============
30-59 days delinquent...................                   -            0.0% $        276           0.9% $      2,421           3.8%
60-89 days delinquent...................                   -            0.0%          133           0.5%        1,697           2.7%
90 days or more delinquent..............                   -            0.0%          443           1.5%        4,015           6.3%
                                                -------------  ------------- ------------- ------------- ------------- -------------
   Total delinquencies..................                   -            0.0% $        852           2.9% $      8,133          12.8%
                                                =============  ============= ============= ============= ============= =============
REO (1)                                                    -            0.0%            -           0.0%            -           0.0%
                                                =============  ============= ============= ============= ============= =============

COMBINED                                                                AS OF DECEMBER 31,
                                                ------------------------------------------------------------------------------------
                                                          1996                       1997                        1998
                                                ---------------------------- --------------------------- ---------------------------
                                                                  % of                        % of                        % of
                                                  (Dollars in    Servicing    (Dollars in   Servicing    (Dollars in    Servicing
                                                  Thousands)     Portfolio    Thousands)    Portfolio     Thousands)    Portfolio
                                                -------------  ------------- ------------- ------------- ------------- -------------
Servicing portfolio.....................        $    641,191                 $    799,085                $    865,663
                                                =============                =============               =============
30-59 days delinquent...................        $      9,360            1.5% $      7,995           1.0% $     11,565           1.3%
60-89 days delinquent...................               6,704            1.0%        7,653           0.9%        7,794           0.9%
90 days or more delinquent..............              19,081            3.0%       17,378           2.2%       22,464           2.6%
                                                -------------  ------------- ------------- ------------- ------------- -------------
   Total delinquencies..................        $     35,145            5.5% $     33,026           4.1% $     41,823           4.8%
                                                =============  ============= ============= ============= ============= =============
REO (1)                                         $      3,951            0.6% $      1,688           0.2% $      2,063           0.2%
                                                =============  ============= ============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>

                                                                                   FOR THE YEARS ENDED DECEMBER 31,
                                                                                --------------------------------------
                                                                                   1996          1997          1998
                                                                                ----------    ----------    ----------
                                                                                        (Dollars in thousands)
<S>                                                                             <C>           <C>           <C>      
    Average servicing portfolio (2) ...............................             $ 615,393     $ 705,928     $ 845,607
    Net losses (3).................................................                 2,160         1,705           983
    Percentage of average servicing portfolio......................                  0.35%         0.24%         0.12%
</TABLE>


    (1)  Includes REO of the Company as well as REO of the securitization trusts
         serviced by the Company; however, excludes private investor REO not
         serviced by the Company.
    (2)  Average servicing portfolio balance equals the quarterly average of the
         servicing portfolio computed as the average of the balance at the
         beginning and end of each quarter.
    (3)  Net losses represent losses realized with respect to disposition of
         REO.

                                       25

<PAGE> 

    The increase in loan losses in 1996 was principally due to disposition of
properties acquired through foreclosures of wholesale loans purchased in 1993
and 1994 from certain originators from which the Company no longer purchases
loans.


LIQUIDITY AND CAPITAL RESOURCES

    As a fundamental part of its business and financial strategy, the Company
securitizes the majority of its loans, whereby the Company deposits into a trust
certain loans originated or acquired by the Company in exchange for (i) debt
instruments backed by the loans in the trust, and (ii) a residual interest in
the trust. The Company then sells the debt instruments to the public. A
significant portion of the Company's revenues, income and cash flow is generated
through these securitizations. Conditions in the securitization market have
deteriorated in recent months as lenders in the sub-prime sector have suffered a
significant loss of liquidity. As a result, there can be no assurances that the
Company will be able to continue to access the securitization market on the same
terms as previously experienced. Any substantial reduction in the availability
of the securitization market for the Company's loans or any substantial
deterioration in the terms to the Company of any securitization, would be likely
to have a material adverse effect on the Company's results of operations and
financial conditions.

    The Company's ability to continue to originate and purchase loans is
dependent upon adequate credit facilities and upon its ability to sell loans in
the secondary market in order to generate cash proceeds for new originations and
purchases. The value of and market for the Company's loans are dependent upon a
number of factors, including general economic conditions, interest rates and
governmental regulations. The current market environment described above has
adversely affected the Company's ability to maintain its current sources of
financing or to obtain new sources of financing at favorable terms. These
factors have also adversely affected the Company's ability to complete
securitizations on the same terms as previously experienced in recent periods.
The Company's inability to complete a securitization in a calendar quarter will
have a material adverse effect on the Company's results of operations for that
quarter. A prolonged duration of the current market environment is likely to
adversely affect the Company's ability to make or purchase loans and its ability
to sell loans in the secondary market, with a consequent adverse impact on the
Company's results of operations and financial condition.

    During the fourth quarter of 1998, the Company's $175 million, $125 million
and (pound)50 million warehouse financing facilities expired, and were not
renewed. In December 1998, the Company entered into a $150 million warehouse
financing facility and a secured term loan facility of approximately $66
million. The $150 million warehouse financing facility is secured by loans
originated or purchased by the Company, expires in December 1999, and bears
interest at a rate ranging between 1.25% to 1.75% over one month United States
dollar denominated London Interbank Offered Rate (LIBOR). As partial
consideration for the $150 million warehouse financing facility, the Company
agreed to grant the warehouse lender stock warrants that may be exercised by the
lender to purchase one percent (1%) of the Company's Common Stock on a diluted
basis, with an effective date in February 1999. The $66 million secured term
loan facility, which was entered into with a company owned by the majority
stockholders of FACO, Brian and Sarah Chisick, and is secured by United Kingdom
mortgages held for investment, bears a fixed interest rate of 8.5%, and matures
as the underlying pledged mortgages are liquidated. These facilities contain
certain affirmative and negative covenants with which the Company was in
compliance at December 31, 1998.

    Although management expects that the Company will be able to maintain these
warehouse financing facilities, there can be no assurance that the Company will
be able to do so. The Company is therefore continuing to pursue other warehouse
financing facility arrangements. To the extent that the Company is not
successful in maintaining or replacing the existing financing arrangements, the
Company may be forced to curtail its loan production activity, which may lead to
significantly reduced loan sales, thereby having a material adverse effect on
the Company's results of operations and financial condition.

    Historically, the Company has generated positive cash flow. The Company's
sources of cash include loan sales, sales of regular interests, borrowings under
its warehouse financing facilities, distributions received from residual
interests, interest income and loan servicing income. The Company's usage of
cash includes the funding of loan originations and purchases, payments of
interest, repayment of its warehouse financing facilities, capital expenditures,
operating and administrative expenses and payment of income taxes.

                                       26

<PAGE> 


    The loan origination and processing fees charged to the borrower are
included in the principal balance of the loan originated. The Company funds such
loans out of available cash or through its warehouse financing facilities. For
loans financed through available cash, the Company receives its loan origination
and processing fees in cash upon sale of the loan. For loans financed through
the warehouse financing facilities, the Company generally receives substantially
all of the loan origination and processing fees in cash at the time of the
warehouse financing facility borrowing.

    During the third quarter of 1996, the Company completed the IPO whereby
6,037,500 shares of Class A Common Stock were sold resulting in gross proceeds
of $68.4 million. After deducting underwriting discounts and costs of the IPO,
the net proceeds of $63.1 million were used to pay $45.0 million of S
distribution notes, to pay down $12.9 million of the Company's warehouse
financing facilities and to fund current operations.

    Prior to the IPO, the Company paid dividends, including amounts to be used
by the stockholders for the payment of personal income tax on the earnings of
the S corporation. In this regard, the Company paid dividends of $12.2 million
in 1996. In addition, in 1996, the Company distributed S distribution notes to
the stockholders of the Company totaling $45.0 million. Proceeds from the IPO
were used to pay the S distribution notes in 1996. Since the completion of the
IPO in July 1996 the Company has been taxed as a C corporation and no cash
dividends have been declared.

    In February 1997, the Company entered into master repurchase agreements to
provide warehouse financing facilities to two mortgage banking companies
("Borrowers") that are controlled by related parties. During 1998, subsequent to
receiving full repayment on the outstanding warehouse financing facilities, the
Company terminated the arrangement with the Borrowers.

    In April 1997, the Board of Directors approved a share repurchase program
under which the Company was authorized to purchase up to 1.5 million shares of
its Class A Common Stock. In January 1998 and July 1998, the Board of Directors
authorized the purchase of an additional 2.0 million shares and 4.0 million
shares of Class A Common Stock, respectively. Of the 7.5 million shares
authorized, the Company had repurchased approximately 4.0 million shares as of
December 31, 1998.

    As of December 31, 1998, the Company had commitments to fund loans of $7.8
million. Historically, approximately 55% of such commitments have ultimately
been funded. Capital expenditures totaled $3.4 million, $6.7 million and $2.3
million in 1998, 1997 and 1996, respectively. In 1997, the Company purchased an
office building for $3.4 million to house the Company's telemarketing
operations.

    The Company is currently negotiating to refinance its 40,000 square foot
office building in Irvine, California, and expects to receive proceeds of
approximately $3.7 million in the first quarter of 1999 in connection with this
refinancing. There can be no assurance, however, that this refinancing will be
achieved.

    The Company believes that cash flows from operations, net proceeds from
securitizations and whole loan sales and the availability of funds under the
warehouse financing facilities will be sufficient to fund operating needs and
capital expenditures for the ensuing 12 months.


YEAR 2000 ISSUE

    The Year 2000 issue is the result of computer programs written using two
digits rather than four digits to define the applicable year. Any of the
Company's internal use computer programs and hardware, as well as its software,
that are date sensitive may recognize a date using the two digits "00" as the
year 1900 rather than the year 2000. Failure to correct the Year 2000 problem
could result in miscalculation of data, causing a disruption of operations
including, among other things, an inability to process loan transactions,
service its loan portfolio or engage in other normal business activities. Such
failure could materially and adversely affect the Company's results of
operations and financial condition.

    The Company has implemented a formal five-step plan in order to address the
Year 2000 issue: (1) Awareness, (2) Inventory, (3) Assessment, (4) Renovation,
and (5) Testing and Implementation. The plan addresses hardware and software
purchased or leased from outside vendors, in-house developed software,
telecommunication equipment and facilities. The first four steps of the plan
have been completed and, thus far, the Company has been required to replace or
renovate only a small amount of older computer equipment to comply with the Year
2000 issue. The Company expects to complete the last step of the plan by the
second quarter of 1999. Because the majority of the Company's computer software
and hardware has been purchased or developed recently and was designed to be
Year 2000 compliant, the Company does not expect its costs to be material in
addressing the Year 2000 issue.

                                       27

<PAGE> 


    The Company has initiated formal communications with its significant outside
vendors to determine the extent to which the Company may be vulnerable in the
event that those parties fail to properly address their own Year 2000 issue.
While the Company is not presently aware of any significant exposure, there can
be no assurance that the systems of third parties on which the Company relies
will be converted in a timely manner. A contingency plan for outside vendors has
not yet been developed for dealing with the most reasonably likely worst case
scenario, and such scenario has not yet been clearly identified. The Company
expects to complete its analysis and contingency plan by June 30, 1999.


EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS

    In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings Per
Shares," which is effective for annual and interim periods ending after December
15, 1997. It supersedes the presentation of primary earnings per share with a
presentation of basic earnings per share which does not consider the effect of
common stock equivalents. The computation of diluted earnings per share, which
gives effect to all dilutive potential common shares that were outstanding
during the period, is consistent with the computation of fully diluted earnings
per share per Accounting Principles Board opinion No. 15. The adoption of this
standard did not have a material effect on the Company's earnings per share.

    Beginning with the first quarter of 1998, the Company adopted FASB SFAS No.
130 "Reporting Comprehensive Income." This statement requires that all items
that are required to be recognized under accounting standards as comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements.

    In June of 1997, the FASB issued SFAS No. 131 "Disclosures about Segments of
an Enterprise and Related Information" which is effective for annual periods
beginning after December 15, 1997. This statement established standards for the
method that public entities use to report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographical areas, and major customers. The
adoption of this standard had no significant impact on the Company's current
presentation of financial statements.

    In February 1998, FASB issued SFAS No. 132 "Employers' Disclosure about
Pensions and Other Postretirement Benefits," which is effective for annual and
interim periods beginning after December 15, 1997. This statement standardizes
the disclosure requirements for pensions and other postretirement benefits to
the extent practicable, requires additional information on changes in the
benefit obligations and fair values of plan assets that will facilitate
financial analysis and eliminates certain disclosures that are no longer useful
as they were under previous statements. The adoption of this standard had no
impact on the Company's current presentation of financial statements.

    In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for annual and interim
periods beginning after June 15, 1999. This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. The Company
has not yet completed its analysis of the effect this standard will have on the
Company's financial condition, results of operations or cash flows.

    In October 1998, the FASB issued SFAS 134, "Accounting for Mortgage-Backed
Securities Retained After the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise," which will become effective for the first fiscal
quarter beginning after December 15, 1998. This statement requires that after
the securitization of mortgage loans held for sale, an entity engaged in
mortgage banking activities classify the resulting mortgage-backed securities
based on its ability and intent to sell or hold those investments. The Company
has reviewed this standard, and its adoption is not expected to have a material
effect on the Company's financial condition, results of operations, or cash
flows.
                                       28

<PAGE> 


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

    The following table provides information regarding the Company's primary
categories of assets and liabilities which are sensitive to changes in interest
rates. The information presented reflects the expected cash flows of the primary
categories by year, including the related weighted average interest rate. The
cash flows for loans held for sale are based on the expectancy of liquidating or
securitizing them. The cash flows for residual interest in securities, loans
held for investment and mortgage servicing rights are based on maturity date and
are adjusted for expected prepayments which are based on historical information.
Cash flows for warehouse financing and other borrowings are based on the
expectancy of liquidating or securitizing the assets to repay the financing, and
are also based on the maturity date and adjusted for expected prepayments which
are based on historical information. For purposes of cash flow presentation,
premiums or discounts on purchased assets, mark-to-market adjustments and loans
on non-accrual are excluded from the amounts presented. See Item 1. Interest
Rate Risk Management and Foreign Currency Risk for a discussion of risk related
to hedging and foreign currency.
<TABLE>
<CAPTION>

                                                 YEAR 1         YEAR 2        YEAR 3        YEAR 4        YEAR 5      THEREAFTER
                                                                        (DOLLARS IN THOUSANDS)
                                                ------------------------------------------------------------------------------------
<S>                                             <C>           <C>             <C>         <C>             <C>          <C>
SELECTED ASSETS:
   Trading
     Loans held for sale                        $ 26,116
     Average interest rate                          9.01%
     Residual interests in securities           $ 18,590      $ 12,712        $ 7,091     $  3,780        $  2,146     $  4,401
     Average interest rate                         15.81%        15.81%         15.81%       15.81%          15.81%       15.81%

   Non-trading
     Loans receivable held for investment       $ 13,064      $ 12,828        $12,828     $ 12,827        $ 12,827     $    352
     Average interest rate                         10.61%        10.60%         10.60%       10.60%          10.60%       11.30%
     Mortgage servicing rights                  $  5,342      $  2,416        $ 1,465       $  744        $     66
     Average interest rate                         15.96%        15.96%         15.96%       15.96%          15.96%

SELECTED LIABILITIES:
   Warehouse financing facility                 $ 30,247      $ 12,709        $12,709     $ 12,708        $ 12,708     $  1,178
   Average interest rate                            7.56%         8.50%          8.50%        8.50%           8.50%        8.50%
   Other borrowings                             $  6,545
   Average interest rate                            8.34%
</TABLE>


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

    See Consolidated Financial Statements beginning on Page F-1 of this Annual
Report on Form 10-K.


ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND 
         FINANCIAL DISCLOSURE

         None.

                                       27

<PAGE> 

                                    PART III


ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

    The information required by this Item is set forth under the caption
"Management" in the Company's definitive Proxy Statement (the "Proxy
Statement"), which will be filed with the Securities and Exchange Commission
pursuant to Regulation 14A under the Securities and Exchange Act of 1934 and is
incorporated herein by reference.


ITEM 11.  EXECUTIVE COMPENSATION

    The information required by this Item is set forth under the caption
"Executive Compensation" in the Proxy Statement, which will be filed with the
Securities and Exchange Commission pursuant to Regulation 14A under the
Securities and Exchange Act of 1934 and is incorporated herein by reference.


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

    The information required by this Item is set forth under the caption
"Security Ownership of Certain Beneficial Owners and Management" in the Proxy
Statement, which will be filed with the Securities and Exchange Commission
pursuant to Regulation 14A under the Securities and Exchange Act of 1934 and is
incorporated herein by reference.


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

    The information required by this Item is set forth under the caption
"Certain Relationships and Related Transactions" in the Proxy Statement, which
will be filed with the Securities and Exchange Commission pursuant to Regulation
14A under the Securities and Exchange Act of 1934 and is incorporated herein by
reference.


                                       30


<PAGE> 




                                     PART IV


ITEM 14.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES, REPORTS ON FORM 8-K

     (a)  1.  Financial Statements:
                Consolidated Statements of Financial Condition:
                 December 31, 1998 and 1997                                F-1
                Consolidated Statements of Income:
                 For each of the three years in the period
                 Ended December 31, 1998                                   F-2
                Consolidated Statements of Comprehensive Income:
                 For each of the three years In the period ended
                 December 31, 1998                                         F-3
                Consolidated Statements of Stockholders' Equity:
                 For each of the three years in the period ended
                 December 31, 1998                                         F-4
                Consolidated Statements of Cash Flows:
                 For each of the three years in the Period ended 
                 December 31, 1998                                         F-5
                Notes to Consolidated Financial Statements:
                 For each of the three years in the Period 
                 ended December 31, 1998                                   F-6
                Independent Auditors' Report                               F-24
          2.  Financial Statement Schedules:
                  None Required
          3.  Exhibits

EXHIBIT
NO.                       DESCRIPTION OF EXHIBIT
---                       ----------------------

3.1     Amended Certificate of Incorporation of the Company *
3.2     Bylaws of the Company (Incorporated by reference to Exhibit 3.2 to the 
        Company's Registration Statement on Form S-1, Commission File No.
        333-3633)
4.1     1996 Stock Incentive Plan (Incorporated by reference to Exhibit 4.1 to
        the Company's Registration Statement on Form S-1, Commission File No.
        333-3633)
4.1.1   Form of Incentive Stock Option Agreement for use with 1996 Stock
        Incentive Plan (Incorporated by reference to Exhibit 4.1.1 to the
        Company's Annual Report on Form 10-K for the year ended December 31,
        1996, Commission File No. 0-28706)
4.1.2   Form of Non-qualified Stock Option Agreement for use with 1996 Stock
        Incentive Plan (Incorporated by reference to Exhibit 4.1.2 to the
        Company's Annual Report on Form 10-K for the year ended December 31,
        1996, Commission File No. 0-28706)
10.1    Warehouse Financing Facility dated October 29, 1993 (Incorporated by 
        reference to Exhibit 10.1 to the Company's Registration Statement on 
        Form S-1, Commission File No. 333-3633)
10.2    Form of Pooling and Servicing  Agreement (Incorporated by reference
        to Exhibit 10.2 to the Company's Registration Statement on Form S-1,
        Commission File No. 333-3633)
10.3    Corporate Headquarters Lease (Incorporated by reference to Exhibit
        10.3 to the Company's Registration Statement on Form S-1, Commission 
        File No. 333-3633)
10.4    S Distribution Notes (Incorporated by reference to Exhibit 10.4 to the
        Company's Registration Statement on Form S-1, Commission File No.
        333-3633)
10.5    Mason Employment Agreement (Incorporated by reference to Exhibit 10.5 
        to the Company's Registration Statement on Form S-1, Commission File
        No. 333-3633)
10.5.1  Mason Loan (Incorporated by reference to Exhibit 10.5.1 of the Company's
        Annual Report on Form 10-K for the year ended December 31, 1996,
        Commission File No. 0-28706)
10.6    Form of Directors' and Officers' Indemnity Agreement (Incorporated  by
        reference to Exhibit 10.7 to the Company's Registration Statement on
        Form S-1, Commission File No. 333-3633)
10.7    Master Repurchase Agreement dated as of October 31, 1997 between 
        Nationscapital Mortgage Corporation and the Company




<PAGE> 


EXHIBIT
NO.                       DESCRIPTION OF EXHIBIT
---                       ----------------------

10.8    Master Repurchase Agreement dated as of October 31, 1997 between Coast
        Security Mortgage Inc. and the Company
10.9    Chisick Employment Agreement (Incorporated by reference to Exhibit 10.10
        to the Company's Registration Statement on Form S-1, Commission File No.
        333-3633)
10.10   Reimbursement Agreement (Incorporated by reference to Exhibit 10.11 to
        the Company's Registration Statement on Form S-1, Commission File No.
        333-3633)
10.11   Warehouse Financing Facility dated September 5, 1996 (Incorporated by
        reference to Exhibit 10.12 to the Company's Quarterly Report on Form
        10-Q for the period ended September 30, 1996, Commission File No.
        0-28706)
10.12   Interim Warehouse and Security Agreement dated as of February 15, 1997
        between Nationscapital Mortgage Corporation and the Company
        (Incorporated by reference to Exhibit 10.12 to the Company's Quarterly
        Report on Form 10-Q for the period ended March 31, 1997, Commission File
        No. 0-28706)
10.13   Interim Warehouse and Security Agreement dated as of February 15, 1997
        between Coast Security Mortgage Inc. and the Company (Incorporated by
        reference to Exhibit 10.13 to the Company's Quarterly Report on Form
        10-Q for the period ended March 31, 1997, Commission File No. 0-28706)
10.14   Smith Loan (Incorporated by reference to Exhibit 10.14 to the Company's
        Quarterly Report on Form 10-Q for the period ended March 31, 1997,
        Commission File No. 0-28706)
10.15   Building Purchase and Sale Agreement between Amresco Residential
        Mortgage Corporation and the Company (Incorporated by reference to
        Exhibit 10.15 to the Company's Quarterly Report on Form 10-Q for the
        period ended September 30, 1997, Commission File No. 0-28706)
10.16   (pound)25,000,000 Warehouse Credit Facility Agreement dated August 18,
        1997 between Prudential Securities Credit Corporation and the Company
        (Incorporated by reference to Exhibit 10.16 to the Company's Quarterly
        Report on Form 10-Q for the period ended September 30, 1997, Commission
        File No. 0-28706)
10.17   Master Repurchase Agreement dated as of October 27, 1997 between First
        Union National Bank and the Company
10.18   Amendment to Warehouse Credit Facility Agreement dated August 18, 1997 
        between Prudential Securities Credit Corporation and the Company 
        (Incorporated by reference to Exhibit 10.18 to the Company's Quarterly 
        Report on Form 10-Q for the period ended March 30, 1998, Commission File
        No. 0-28706)
10.19   Master Repurchase Agreement dated as of December 30, 1998 between Lehman
        Commercial Paper Inc. and the Company *
21      Subsidiaries of the Registrant *
27      Financial Data Schedule *
----------------
* Filed herewith

       (a)  Reports on Form 8-K:
               None


<PAGE> 


                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

Date:      March 15, 1999
     ------------------------

                                                 FIRST ALLIANCE CORPORATION

                                            By: /S/ BRIAN CHISICK
                                                --------------------------------
                                                    Brian Chisick
                                                    President and
                                                    Chief Executive Officer

         Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on date indicated.

   SIGNATURE                      TITLE                                DATE
   ---------                      -----                                ----


/S/ BRIAN CHISICK              President and Chief Executive      March 15, 1999
----------------------         Officer, Director                                
    Brian Chisick              PRINCIPAL EXECUTIVE OFFICER


/S/ FRANCISCO NEBOT            Executive Vice President and       March 15, 1999
----------------------         Chief Financial Officer,
    Francisco Nebot            Director, PRINCIPAL ACCOUNTING
                               OFFICER


/S/ JEFFREY W. SMITH           Executive Vice President and       March 15, 1999
---------------------          Chief Operating Officer,
    Jeffrey W. Smith           Director


/S/ SARAH CHISICK              Vice President, Director           March 15, 1999
---------------------
    Sarah Chisick


/S/ MERRILL BUTLER             Director                           March 15, 1999
---------------------
    Merrill Butler


/S/ ALBERT L. LORD             Director                           March 15, 1999
---------------------
    Albert L. Lord





<PAGE> 




                           FIRST ALLIANCE CORPORATION

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


Consolidated Statements of Financial Condition
         As of December 31, 1997 and 1998                                   F-1

Consolidated Statements of Income
         For each of the three years in 
         the period ended December 31, 1998                                 F-2

Consolidated Statements of Comprehensive Income
         For each of the three years in the period
         ended December 31, 1998                                            F-3

Consolidated Statements of Stockholders' Equity
         For each of the three years in the period
         ended December 31, 1998                                            F-4

Consolidated Statements of Cash Flows
         For each of the three years in the period
         ended December 31, 1998                                            F-5

Notes to Consolidated Financial Statements
         For each of the three years in the period
         ended December 31, 1998                                            F-7

Independent Auditors' Report                                                F-24






<PAGE> 

                           FIRST ALLIANCE CORPORATION

                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

                             (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>


                                                                                                      DECEMBER 31,
                                                                                              --------------------------
                                                                                                 1997            1998
                                                                                              ----------      ----------
                                            ASSETS
<S>                                                                                           <C>             <C>
Cash and cash equivalents.................................................................... $  14,032       $  18,052
Restricted cash..............................................................................                     1,281
Receivable from trusts.......................................................................     3,085           4,652
Loans held for sale..........................................................................    54,872          24,421
Warehouse financing receivable...............................................................    12,324                
Loans receivable held for investment.........................................................     2,082          57,667
Residual interests in securities - at fair value.............................................    50,238          48,720
Mortgage servicing rights....................................................................     9,240          10,033
Property, net................................................................................     8,587           9,733
Prepaid expenses and other assets............................................................     3,687           3,044
                                                                                              ----------      ----------
    Total assets............................................................................. $ 158,147       $ 177,603
                                                                                              ==========      ==========

                             LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Warehouse financing facilities............................................................... $  57,742       $  17,539
Secured term loan facility - related party...................................................                    64,720
Other borrowings.............................................................................                     6,545
Accounts payable and accrued liabilities.....................................................     4,769           5,757
Income taxes payable.........................................................................     3,664           1,142
Deferred tax liabilities.....................................................................       670           7,299
Notes payable................................................................................        25              14
                                                                                              ----------      ----------
    Total liabilities........................................................................    66,870         103,016
                                                                                              ----------      ----------

Commitments and contingencies (Note 9)

Stockholders' equity:
Preferred Stock $.01 par value:  1,000,000 shares authorized; no shares outstanding..........
Class A Common Stock, $.01 par value; 50,000,000 shares authorized; shares issued and
    outstanding:  22,186,288 at December 31, 1998, 11,265,375 at December 31,1997............       112             223
Class B Common Stock, $.01 par value; 25,000,000 shares authorized; shares issued and
    outstanding:  10,956,270 at December 31, 1997............................................       110                
Additional paid in capital...................................................................    65,321          65,298
Retained earnings............................................................................    47,110          61,326
Treasury stock - at cost:  4,046,800 shares at December 31, 1998 and 1,169,300 at
    December 31, 1997........................................................................   (20,544)        (51,582)
Deferred stock compensation..................................................................      (765)              
Accumulated other comprehensive income.......................................................       (67)           (678)
                                                                                              ----------      ----------
    Total stockholders' equity...............................................................    91,277          74,587
                                                                                              ----------      ----------
    Total liabilities and stockholders' equity............................................... $ 158,147       $ 177,603
                                                                                              ==========      ==========
</TABLE>


                See notes to consolidated financial statements.

                                      F-1

<PAGE>


                           FIRST ALLIANCE CORPORATION

                        CONSOLIDATED STATEMENTS OF INCOME

                 (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>


                                                                                       YEARS ENDED DECEMBER 31,
                                                                                --------------------------------------
                                                                                  1996           1997          1998
                                                                                ----------    ----------    ----------
<S>                                                                             <C>           <C>           <C> 
REVENUE:
    Loan origination and sale......................................             $  48,171     $  66,678     $  54,951
    Loan servicing and other fees..................................                 8,854         7,544         3,930
    Interest and other.............................................                13,846        21,427        24,927
                                                                                ----------    ----------    ----------
      Total revenue................................................                70,871        95,649        83,808
                                                                                ----------    ----------    ----------

EXPENSE:
    Compensation and benefits......................................                15,488        19,341        22,857
    Advertising....................................................                 4,191         6,099         9,357
    Professional services and other fees...........................                 1,946         3,196         4,762
    Facilities and insurance.......................................                 2,511         3,362         4,332
    Supplies.......................................................                 1,575         2,416         2,498
    Depreciation and amortization..................................                   838           924         2,157
    Interest.......................................................                 2,655         3,164         8,382
    Legal                                                                             917         2,009         3,851
    Travel and training............................................                 1,163         1,710         1,521
    Other .........................................................                 1,348           783         1,138
                                                                                ----------    ----------    ----------
      Total expense................................................                32,632        43,004        60,855
                                                                                ----------    ----------    ----------

INCOME BEFORE INCOME TAX PROVISION.................................                38,239        52,645        22,953

INCOME TAX PROVISION...............................................                 6,100        19,873         8,737
                                                                                ----------    ----------    ----------

NET INCOME.........................................................             $  32,139     $  32,772     $  14,216
                                                                                ==========    ==========    ==========

NET INCOME PER SHARE:
    Basic..........................................................             $    1.72     $    1.50     $    0.73
                                                                                ==========    ==========    ==========
    Diluted........................................................             $    1.72     $    1.49     $    0.73
                                                                                ==========    ==========    ==========

Weighted average number of common shares outstanding:
    Basic..........................................................             18,638,423    21,851,732    19,380,119
    Diluted........................................................             18,672,872    22,030,438    19,431,219
</TABLE>


                See notes to consolidated financial statements.

                                      F-2


<PAGE> 


                           FIRST ALLIANCE CORPORATION

                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                       YEARS ENDED DECEMBER 31,
                                                                                --------------------------------------
                                                                                  1996           1997          1998
                                                                                ----------    ----------    ----------
<S>                                                                             <C>           <C>           <C>
NET INCOME.........................................................             $  32,139     $  32,772     $  14,216

OTHER COMPREHENSIVE INCOME
    Foreign currency translation adjustment net of income taxes of
    $375, $18 and $7 for 1998, 1997 and 1996, respectively.........                   (38)          (29)         (611)
                                                                                ----------    ----------    ----------

COMPREHENSIVE INCOME................................................            $  32,101     $  32,743     $  13,605
                                                                                ==========    ==========    ==========
</TABLE>

                 See notes to consolidated financial statements


                                      F-3

<PAGE>

<TABLE>
                                                       FIRST ALLIANCE CORPORATION

                                             CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                                                         (Dollars in thousands)
<CAPTION>

                                               Class A              Class B        Additional
                                             Common Stock         Common Stock       Paid in   Retained
                                           Shares     Amount    Shares      Amount   Capital   Earnings  
                                        ------------  ------  ------------  ------  --------- ---------- 
<S>                                     <C>           <C>      <C>          <C>     <C>       <C>        
Balance at December 31, 1995............                       15,963,750   $  42             $  42,279  

Dividends...............................                                                        (15,085) 
Distribution of S distribution notes....                                                        (44,995) 
Net income..............................                                                         32,139
Issuance of restricted stock............                          161,250     119   $  1,481         
Initial public offering of stock........   6,037,500  $  60                           63,089           
Amortization of deferred stock 
    compensation........................                                                               
Foreign currency translation
    adjustment..........................                                                               
                                        ------------  ------  ------------  ------  --------- ---------- 
Balance at December 31, 1996............  6,037,500   $  60    16,125,000   $ 161   $ 64,570  $  14,338

Net income..............................                                                         32,772   
Issuance of stock.......................     59,145         1                            670    
Tax benefit from exercise
    of stock options....................                                                  81
Purchase of treasury stock..............   
Conversion of Class B Stock
     to Class A Stock...................  5,168,730        51  (5,168,730)    (51)
Amortization of deferred
     stock compensation.................   
Foreign currency translation
     adjustment.........................   
                                        ------------  ------  ------------  ------  --------- ---------- 
Balance at December 31, 1997............ 11,265,375   $ 112    10,956,270   $ 110   $  65,321 $  47,110

Net income..............................                                                         14,216 
Issuance of stock.......................     45,913       1                               520           
Tax benefit from exercise
    of stock options....................                                                  263 
Purchase of treasury stock..............    
Conversion of Class B Stock
    to Class A Stock.................... 10,875,000     110    (10,875,00)   (110)  
Forfeitures of Class B Stock............                          (81,270)               (806)
Amortization of deferred
    stock compensation..................   
Foreign currency translation
    adjustment..........................    
                                        ------------  ------  ------------  ------  --------- ---------- 
Balance at December 31, 1998............ 22,186,288   $ 223           ---   $ ---   $ 65,298  $  61,326  
                                        ============  ======  ============  ======  ========= =========== 
</TABLE>

continued on next page..

                See notes to consolidated financial statements.

                                      F-4


<PAGE>

<TABLE>
                                                       FIRST ALLIANCE CORPORATION

                                       CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - Continued

                                                         (Dollars in thousands)
<CAPTION>

                                                                     Deferred    Accumulated      Total
                                             Treasury Stock           Stock      Compensation  Stockholders'
                                          Shares        Amount     Compensation     Income        Equity
                                        ------------  -----------  ------------  ------------  -------------
<S>                                     <C>           <C>          <C>           <C>           <C>    
Balance at December 31, 1995............                                                       $     42,321

Dividends...............................                                                            (15,085) 
Distribution of S distribution notes....                                                            (44,995) 
Net income..............................                                                             32,139
Issuance of restricted stock............                           $    (1,600)
Initial public offering of stock........                                                             63,149
Amortization of deferred stock 
    compensation........................                                   487                          487
Foreign currency translation
    adjustment..........................                                         $       (38)           (38)
                                        ------------  -----------  ------------  ------------  -------------
Balance at December 31, 1996............                           $    (1,113)  $       (38)  $     77,978

Net income..............................                                                             32,772   
Issuance of stock.......................                                                                671
Tax benefit from exercise
    of stock options....................                                                                 81
Purchase of treasury stock..............  1,169,300   $  (20,544)                                   (20,544)
Conversion of Class B Stock
     to Class A Stock...................  
Amortization of deferred
     stock compensation.................                                   348                          348
Foreign currency translation
     adjustment.........................                                                 (29)           (29)
                                        ------------  -----------  ------------  ------------  -------------
Balance at December 31, 1997............  1,169,300   $  (20,544)  $      (765)  $       (67)  $     91,277

Net income..............................                                                             14,216 
Issuance of stock.......................                                                                521
Tax benefit from exercise
    of stock options....................                                                                263 
Purchase of treasury stock..............  2,877,500      (31,038)                                   (31,038)
Conversion of Class B Stock
    to Class A Stock....................                                                                ---
Forfeitures of Class B Stock............                                   806                          ---
Amortization of deferred
    stock compensation..................                                   (41)                         (41)
Foreign currency translation
    adjustment..........................                                                (611)          (611)
                                        ------------  -----------  ------------  ------------  -------------
Balance at December 31, 1998............  4,046,800   $  (51,582)  $       ---   $      (678)  $     74,587
                                        ============  ===========  ============  ============  =============
</TABLE>

                See notes to consolidated financial statements.

                                      F-4


<PAGE> 



                           FIRST ALLIANCE CORPORATION

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                             (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>

                                                                                        YEARS ENDED DECEMBER 31,
                                                                                --------------------------------------
                                                                                  1996           1997          1998
                                                                                ----------    ----------    ----------
<S>                                                                             <C>           <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income..................................................................    $  32,139     $  32,772     $  14,216
Adjustments to reconcile net income to net cash provided by
  (used in) operating activities:
     Capitalized residual interests and mortgage servicing rights...........      (12,020)      (26,120)      (18,395)
     Accretion of residual interest in securities...........................       (9,913)      (12,130)       (8,260)
     Collection of residual interest in securities..........................        8,568        11,193        21,652
     Deferred income taxes..................................................       (3,028)        3,774         6,886
     Amortization of mortgage servicing rights..............................        1,813         2,857         5,728
     Depreciation and amortization..........................................          838           923         2,157
     Deferred stock compensation............................................          487           348           (41)
     Accretion of discounts on loan receivable..............................         (268)         (143)           51
     Recognition of deferred fees on loans receivable held for investment...                                     (118)
     Foreign currency transaction (gain) loss ..............................         (188)          146          (155)
     Loss on sales of property..............................................          414            70            22
  Changes in assets and liabilities:
     Restricted cash........................................................                                   (1,281)
     Receivable from trusts.................................................        1,993          (414)       (1,567)
     Loans held for sale....................................................       12,112       (44,416)      (26,450)
     Prepaid expenses and other assets......................................        1,681        (1,562)          645
     Accounts payable and accrued liabilities...............................       (1,282)          816           986
     Income taxes payable...................................................        5,396        (1,651)       (2,522)
                                                                                ----------    ----------    ----------
       Net cash provided by (used in) operating activities.................        38,742       (33,537)       (6,446)
                                                                                ----------    ----------    ----------

CASH FLOWS FROM INVESTING ACTIVITIES:
Repayments (advances) on warehouse financing receivable.....................                    (12,324)       12,324
Capital expenditures........................................................       (2,286)       (6,653)       (3,355)
Collections on loans receivable held for investment.........................        1,518           954         1,606
Proceeds from sales of property.............................................        1,748           645            98
                                                                                ----------    ----------    ----------
       Net cash provided by (used in) investing activities..................          980       (17,378)       10,673
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) on warehouse financing facilities...............      (18,233)       57,641        24,321
Proceeds from other borrowings..............................................                                    6,545
Purchase of treasury stock..................................................                    (20,544)      (31,038)
Proceeds from issuance of stock (net of issuance costs).....................       63,149                           
Proceeds from exercise of stock options.....................................                        671           521
Payments on notes payable...................................................       (1,163)         (188)          (11)
Payments on S distribution notes............................................      (44,995)            
Cash dividends..............................................................      (15,085)            
Proceeds from issuance of notes payable to stockholders.....................        1,000             
Payments on notes payable to stockholders...................................       (1,000)            
                                                                                ----------    ----------    ----------
       Net cash (used in) provided by financing activities..................      (16,327)       37,580           338
Effect of exchange rate changes on cash.....................................                        (47)         (545)
                                                                                ----------    ----------    ----------

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........................       23,395       (13,382)        4,020
CASH AND CASH EQUIVALENTS, beginning of period..............................        4,019        27,414        14,032
                                                                                ==========    ==========    ==========
CASH AND CASH EQUIVALENTS, end of period ...................................    $  27,414     $  14,032     $  18,052
                                                                                ==========    ==========    ==========
</TABLE>
                           FIRST ALLIANCE CORPORATION
                See notes to consolidated financial statements.

                                      F-5

<PAGE> 

                           FIRST ALLIANCE CORPORATION

               CONSOLIDATED STATEMENTS OF CASH FLOWS - (continued)

                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>

                                                                                        YEARS ENDED DECEMBER 31,
                                                                                --------------------------------------
                                                                                  1996           1997          1998
                                                                                ----------    ----------    ----------
<S>                                                                             <C>           <C>           <C>
SUPPLEMENTAL INFORMATION:
Interest paid......................................................             $   2,735     $   2,694     $   8,395
                                                                                ==========    ==========    ==========
Income taxes paid..................................................             $   3,686     $  17,764     $   3,831
                                                                                ==========    ==========    ==========

SUPPLEMENTAL INFORMATION ON NON-CASH INVESTING
     AND FINANCING ACTIVITIES:
Transfer of loans held for sale to loans receivable 
     held for investment...........................................             $   1,421     $     594     $  57,050
                                                                                ==========    ==========    ==========
Distribution of S Distribution Notes...............................             $  44,995
                                                                                ==========
Grant of restricted stock..........................................             $   1,600
                                                                                ==========

</TABLE>


                See notes to consolidated financial statements.


                                      F-6





<PAGE> 


                           FIRST ALLIANCE CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
        FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998


NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    BASIS OF PRESENTATION - The consolidated financial statements include the
accounts of First Alliance Corporation ("FACO") and its subsidiaries
(collectively the "Company"). The Company is a financial services organization
principally engaged in mortgage loan origination, purchases, sales and
servicing. The majority of the Company's loans are made to owners of single
family residences who use the loan proceeds for such purposes as debt
consolidation and financing of home improvements. The Company securitizes the
loans in a trust or sells loans to wholesale purchasers. A significant portion
of the loans are securitized with the Company retaining the right to service the
loans. The Company is currently licensed as a consumer finance lender in
eighteen states, the District of Columbia and the United Kingdom. As of December
31, 1998, however, the Company discontinued its United Kingdom loan origination
operations. The Company does not believe that the discontinuation of this
program will have a material effect on the Company's financial condition,
results of operations or cash flows. The Company's business may be affected by
many factors including real estate and other asset values, the level of and
fluctuations in interest rates, changes in the securitization market and
competition.

    The consolidated financial statements are prepared in accordance with
generally accepted accounting principles. All significant intercompany accounts
and transactions have been eliminated in consolidation.

    In July and August 1996, FACO completed an initial public offering (the
"Offering") whereby 6,037,500 shares of its Class A Common Stock were sold to
the public resulting in gross proceeds of $68.4 million. Concurrently,
16,125,000 shares of the Class B Common Stock of FACO were issued in exchange
for all of the issued and outstanding shares of First Alliance Mortgage Company
("FAMCO") as part of a reorganization whereby FAMCO became a wholly owned
subsidiary of FACO. The acquisition of FAMCO has been accounted for similar to a
pooling of interests. The consolidated financial position and results of
operations of the Company for periods prior to the date of the reorganization
substantially consist of those of FAMCO. After deducting underwriting discounts
and offering costs of $5.3 million, net proceeds from the Offering were $63.1
million. By August 1998, all Class B Common Stock of FACO was converted to Class
A Common Stock.

    CASH AND CASH EQUIVALENTS - The Company considers all highly liquid debt
instruments purchased with an original maturity of three months or less to be
cash equivalents.

    RESTRICTED CASH - As part of the Company's credit card program, the Company
is required to maintain a cash balance restricted for the purpose of reserving
for credit losses. The Company had a cash balance of $1.3 million related to
this as of December 31, 1998.

    ALLOWANCE FOR ESTIMATED LOSSES ON CREDIT CARD ACCOUNTS - The allowances for
estimated net losses on credit card accounts represent the Company's estimate of
net losses to be realized. This estimate is based on historical charge-off
ratios and recoveries. The Company's policy is to charge-off any credit card
accounts greater than 90 days delinquent. During 1998, the Company recorded a
provision of $1.5 million and recognized charge-offs of $0.7 million. As of
December 31, 1998, the Company had an allowance for estimated net losses of $0.8
million related to credit card accounts of approximately $26 million.

    RECEIVABLE FROM TRUSTS - In the normal course of servicing loans previously
securitized, the Company advances payments and other costs to the securitization
trusts. In such cases, funds advanced are reflected in the consolidated
statements of financial condition as receivable from trusts. Advances are
recovered through subsequent collections from the trusts or borrowers.

    LOANS - Loans held for sale are loans the Company plans to sell or
securitize which are carried at the lower of aggregate cost or market value.

                                      F-7
<PAGE>

Loan origination and processing fees and related direct origination costs are
deferred until the related loan is sold. Loans receivable held for investment
are loans the Company has purchased or originated and has the intent and ability
to hold to maturity. Loan origination and processing fees and related direct
origination costs associated with loans receivable held for investment are
deferred and offset against the related loans, and the net fee or cost is
amortized into income over the contractual lives of the related loans. Loans
transferred from loans held for sale to loans receivable held for investment are
transferred at the lower of cost or market value. When a loan becomes over 90
days contractually delinquent, it is placed on non-accrual status and unpaid
interest income is reversed. While a loan is on non-accrual status, interest is
recognized only as cash is received.


                           FIRST ALLIANCE CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
        FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998

    ALLOWANCES FOR ESTIMATED LOSSES ON LOANS AND REAL ESTATE OWNED - The
allowances for estimated losses on loans and real estate owned ("REO") represent
the Company's estimate of identified and unidentified losses. These estimates,
while based upon historical loss experience and other relevant data, are
ultimately subjective and inherently uncertain. Estimated losses on loans are
collectively evaluated for impairment. When the estimated losses are determined
to be permanent, as in the case of an REO, the Company then establishes a
specific allowance for estimated losses.

    RESIDUAL INTERESTS IN SECURITIES - The Company securitizes a majority of
loans held for sale in a trust. The trust is a multi-class security which
derives its cash flow from a pool of mortgages. The regular interests of the
securitization trusts are sold and the residual interests are retained by the
Company. The documents governing the Company's securitizations require the
Company to establish initial overcollateralization or build
overcollateralization levels through retention of distributions by the
securitization trust otherwise payable to the Company as the residual interest
holder. This overcollateralization causes the aggregate principal amount of the
loans in the related pool and/or cash reserves to exceed the aggregate principal
balance of the outstanding regular interests. Such excess amounts serve as
credit enhancement for the regular interests of the related securitization
trust. To the extent that borrowers default on the payment of principal or
interest on the loans, losses will reduce the overcollateralization to the
extent that funds are available. If payment defaults exceed the amount of
overcollateralization, as applicable, the insurance policy maintained by the
related securitization trust will pay any further losses experienced by holders
of the regular interests in the related securitization trust. The Company does
not have any recourse obligations for credit losses in the securitization trust.

    The Company classifies residual interests as trading securities which are
carried at fair value with any unrealized gains or losses recorded in the
results of operations in the period of the change in fair value. Valuations at
origination and at each reporting period are based on discounted cash flow
analyses. The cash flows are estimated as the excess of the weighted average
coupon on each pool of underlying mortgages over the sum of the pass-through
interest rates on the regular interests of the related securitization trust,
servicing fees, trustee fees, insurance fees, and an estimate of annual future
loan losses. These cash flows are projected over the life of the loans using
prepayment, default, loss, and interest rate assumptions that market
participants would use for similar financial instruments and are discounted
using an interest rate that a purchaser unrelated to the seller of such a
financial instrument would demand. The valuation includes consideration of
characteristics of the loans including loan type and size, interest rate,
origination date, term and geographic location. The Company arrives at its
prepayment assumptions by using the actual six month prepayment average, which
is applied to the first 18 months of cash flows, and the actual life to date
prepayment average to the remaining months of cash flows. To the Company's
knowledge, there is no active market for the sale of these residual interests.
The range of possible values attributable to the factors used in determining
fair value is broad. Accordingly, the Company's estimate of fair value is
subjective. The Company capitalized $16.4 million, $17.1 million and $8.7
million in residual interest certificates in 1998, 1997 and 1996, respectively.
During the same periods, cash collections related to residual interest
certificates totaled $21.7 million, $11.2 million and $8.6 million,
respectively. During 1998, 1997 and 1996, the Company recorded aggregate
unrealized gains/(losses) in the value of its residual interests of ($3.3)
million, $5.4 million, and ($0.5) million, respectively. These unrealized
gains/(losses) are included in loan origination and sale revenue.

                                      F-8


<PAGE> 

                           FIRST ALLIANCE CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
        FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998

    During 1998 and 1997, the Company utilized the following assumptions to
value its residual interest certificates at origination and at year-end
reevaluation:
<TABLE>
<CAPTION>

                                                            1997                                        1998
                                          ------------------------------------------    -------------------------------------
                                           Fixed Rate Loans          Adjustable            Fixed Rate          Adjustable
                                                                     Rate Loans              Loans             Rate Loans
                                          -------------------    -------------------    -----------------    ----------------
<S>                                       <C>                    <C>                    <C>                  <C>
AT ORIGINATION (1)
------------------
    Weighted average CPR                         25%                    35%                     26%                  40%
    Discount rate                                15%                    15%                  15% - 18%            15% - 18%
    Weighted average life (in years)            3.5                    2.3                     3.3                  1.9
    Gross anticipated credit losses             1.6%                   1.1%                    1.8%                 0.9%

AT YEAR-END REEVALUATION (2)
----------------------------
    Weighted average CPR                         28%                    44%                     27%                  49%
    Discount rate                                15%                    15%                  15% - 18%            15% - 18%
    Weighted average life (in years)            3.1                    1.9                      3.2                  1.6
    Gross anticipated credit losses             1.4%                   0.9%                     1.8%                 1.2%
</TABLE>


(1)   Includes securitizations consummated during 1998 and 1997.
(2)   Includes all outstanding securitizations consummated.

    MORTGAGE SERVICING RIGHTS - Upon the sale or securitization of servicing
retained loans, the Company capitalizes the costs associated with the right to
service mortgage loans based on their relative fair values. The Company
determines the fair value of the servicing rights based on the present value of
estimated net future cash flows related to servicing income. Assumptions used to
value mortgage servicing rights are consistent with those used to value residual
interests. The value allocated to the mortgage servicing rights is amortized in
proportion to and over the period of estimated net future servicing fee income.

    The Company capitalized $7.0 million, $6.1 million and $3.8 million of
mortgage servicing rights for the years ended December 31, 1998, 1997 and 1996,
respectively. During the same periods, related amortization of such mortgage
servicing rights was $5.7 million, $2.9 million and $1.8 million, respectively.
The Company periodically evaluates capitalized mortgage servicing rights for
impairment, which represents the excess of unamortized cost over fair value.
This review is performed on a disaggregated basis based on loan type. The
Company generally makes loans to credit impaired borrowers whose borrowing needs
may not be met by traditional financial institutions due to credit exceptions.
The Company has found that credit impaired borrowers are payment sensitive
rather than interest rate sensitive. Therefore, the Company does not consider
interest rates a predominant risk characteristic for purposes of evaluating
impairment. Impairment, if it occurs, is recognized in a valuation allowance for
each pool in the period of impairment. At December 31, 1998, the estimated fair
value of mortgage servicing rights was $10.0 million and no valuation allowance
existed.

    PROPERTY - Property is stated at cost and depreciated over the estimated
useful lives of the assets using straight line or accelerated methods. Leasehold
improvements are amortized on the straight-line method over the lesser of the
useful lives of the assets or the terms of the related leases. Useful lives
generally range from three to seven years.

    REAL ESTATE OWNED - Real estate acquired in settlement of loans generally
results when property collateralizing a loan is foreclosed upon or otherwise
acquired by the Company in satisfaction of the loan. Real estate acquired
through foreclosure is carried at fair value less costs to dispose. Fair value
is based on the net amount that the Company could reasonably expect to receive
for the asset in a current sale between a willing buyer and a willing seller,
that is, other than in a forced or liquidation sale.


                                      F-9
<PAGE>

                           FIRST ALLIANCE CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
        FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998

    Adjustments to the carrying value of REO are made through valuation
allowances and chargeoffs recognized through a charge to earnings.

    REVENUE RECOGNITION - The Company derives its revenue principally from gains
on sales of loans, fees for the origination of loans, loan servicing fees and
interest income. The Company sells its loans through securitization and whole
loan sales. Origination fees from loans pooled and securitized or sold in the
secondary market is recognized when such loan pools are sold. The Company
retains the right to service all loans it securitizes. The Company receives a
management fee for servicing loans based on a fixed percentage of the declining
principal balance of securitized loan pools and other ancillary and prepayment
fees associated with the servicing of such loans. The Company has historically
retained a residual interest in the securitization trusts.

    Gains on servicing retained sales of loans through securitization represent
the difference between the net proceeds to the Company in the securitization and
the allocated cost of loans securitized. The allocated cost of the loans
securitized is determined by allocating their acquisition cost (for purchased
loans) or net carrying value (for originated loans) between the loans
securitized and the residual interests and the mortgage servicing rights
retained by the Company based upon their relative fair values. The net carrying
value of originated loans is equal to their principal balance less net deferred
origination fees. At origination, the Company classifies the residual interests
as trading securities, which are carried at fair value. The difference between
the fair value of residual interests and their allocated cost is recorded as
gain on securitization and is included in loan origination and sale revenue.
Gains on servicing released whole loan sales equal the difference between the
net proceeds to the Company from such sales and the loans' acquisition costs or
net carrying values.

    Loan servicing and other fees are recorded as earned.

    Interest income is recorded as earned. Interest income represents the
interest earned on loans held for sale during the period prior to their
securitization or sale, loans receivable held for investment, residual interests
and cash equivalents.

    INCOME TAXES - Deferred tax assets and liabilities are determined based on
temporary differences between financial reporting and tax basis of assets and
liabilities and are measured by applying enacted tax rates and laws to taxable
years in which such temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.

    STOCK SPLIT - In October 1997 the Board of Directors authorized a
three-for-two stock split to be effected in the form of a stock dividend. The
stock dividend was distributed on October 31, 1997, to holders of record on
October 15, 1997. All balances and transactions in common stock and additional
paid in capital and all share and per share data, including shares issued and
outstanding, shares repurchased and net income per share, have been restated to
reflect the stock dividend. All outstanding options under the Company's stock
incentive plan have been adjusted for the effect of the stock dividend.

    USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS - The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.

    FOREIGN CURRENCY TRANSLATION - The financial statements of the Company's
United Kingdom subsidiary were prepared in pounds sterling, its functional
currency, and translated into dollars at the current exchange rate at the end of
the period for the statements of financial condition and at a weighted average
rate for the period for the statements of income. Translation adjustments are
reflected as foreign currency translation adjustments in stockholders' equity
and accordingly have no effect on income. The Company considers its receivables
from its United Kingdom subsidiary as a long-term investment. Therefore,
unrealized foreign currency gains and losses from this transaction are treated
like translation adjustments to stockholders' equity and therefore have no
effect on income. Foreign currency transaction gains and losses for the
Company's United Kingdom subsidiary are included in income.

                                      F-10

<PAGE> 47
                           FIRST ALLIANCE CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
        FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998

    RECENT ACCOUNTING PRONOUNCEMENTS - In February 1997, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 128 "Earnings Per Share" which is effective for annual
and interim periods ending after December 15, 1997, and requires retroactive
application to all periods presented. It supersedes the presentation of primary
earnings per share with a presentation of basic earnings per share which does
not consider the effect of common stock equivalents. The computation of diluted
earnings per share, which gives effect to all dilutive potential common shares
that were outstanding during the period, is consistent with the computation of
fully diluted earnings per share per Accounting Principles Board Opinion No. 15.
The adoption of this standard did not have a material effect on the Company's
net income per share in 1998, 1997 and 1996.

    Beginning with the first quarter of 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income". This statement requires that all items that
are required to be recognized under accounting standards as comprehensive income
be reported in a financial statement that is displayed with the same prominence
as other financial statements.

    In June of 1997, the FASB issued SFAS No. 131 "Disclosures about Segments of
an Enterprise and Related Information" which is effective for annual periods
beginning after December 15, 1997. This statement established standards for the
method that public entities use to report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographical areas, and major customers.

    In February 1998, FASB issued SFAS No. 132 "Employers' Disclosure about
Pensions and Other Postretirement Benefits," which is effective for annual and
interim periods beginning after December 15, 1997. This statement standardizes
the disclosure requirements for pensions and other postretirement benefits to
the extent practicable, requires additional information on changes in the
benefit obligations and fair values of plan assets that will facilitate
financial analysis and eliminates certain disclosures that are no longer useful
as they were under previous statements. The adoption of this standard had no
impact on the Company's current presentation of financial statements.

    In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for annual and interim
periods beginning after June 15, 1999. This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. The Company
has not yet completed its analysis of the effect this standard will have on the
Company's financial condition, results of operations or cash flows.

    In October 1998, the FASB issued SFAS 134, "Accounting for Mortgage-Backed
Securities Retained After the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise," which will become effective for the first fiscal
quarter beginning after December 15, 1998. This statement requires that after
the securitization of mortgage loans held for sale, an entity engaged in
mortgage banking activities classify the resulting mortgage-backed securities
based on its ability and intent to sell or hold those investments. The Company
has reviewed this standard, and its adoption is not expected to have a material
effect on the Company's financial condition, results of operations or cash
flows.

    RECLASSIFICATIONS - Certain reclassifications have been made to conform the
1997 and 1996 consolidated financial statements to the 1998 presentation.

                                      F-11
<PAGE> 

                           FIRST ALLIANCE CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
        FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998

NOTE 2.  LOANS RECEIVABLE HELD FOR INVESTMENT

    Loans receivable held for investment are collateralized principally by
single family residences. The loans bear interest at fixed and variable rates
ranging up to 15.95% per annum and are due in monthly installments of principal
and interest through December 2029. The majority of loans receivable held for
investment relate to the United Kingdom portfolio of approximately $64 million,
which carry an average interest rate of approximately 10.6%.

<TABLE>

NOTE 3.  PROPERTY
<CAPTION>

    Property consists of the following at December 31:                          1997        1998
                                                                              ---------   ---------
                                                                            (Dollars in thousands)

<S>                                                                           <C>        <C>     
        Office equipment....................................................  $  6,835   $  8,251
        Land................................................................     2,100       2,100
        Building............................................................     1,425       1,391
        Building Improvements...............................................                 1,431
        Computer software...................................................       841         923
        Vehicles............................................................       314         292
        Leasehold improvements..............................................       287         282
                                                                              ---------   ---------
        Property............................................................    11,802      14,670
        Less accumulated depreciation  and amortization.....................    (3,215)     (4,937)
                                                                              ---------   ---------
        Property, net.......................................................  $  8,587    $  9,733
                                                                              =========   =========
</TABLE>


NOTE 4.  SERVICING PORTFOLIO

    Trust and other custodial funds, relating to loans serviced for others,
totaled $41 million and $25 million at December 31, 1998 and 1997, respectively.
Such funds, which are maintained in separate bank accounts, are excluded from
the Company's assets and liabilities.

    Total loans serviced amounted to $866 million and $799 million at December
31, 1998 and 1997, respectively.

    Approximately 88% of the servicing portfolio relates to loans serviced on
behalf of the trust, with the remaining 12% relating to loans serviced on behalf
of private lenders or loans held for sale. At December 31, 1998, loans serviced
related to property located in California comprised of approximately 43% of the
total serviced loan portfolio, while no other state comprised more than 10%.
Total delinquencies greater than 30 days as a percentage of the total servicing
portfolio were 4.8%, 4.1% and 5.5% at December 31, 1998, 1997 and 1996,
respectively. Delinquencies greater than 30 days related to the United States
portfolio were 4.2%, 4.2% and 5.6% at December 31, 1998, 1997 and 1996,
respectively. Delinquencies greater than 30 days as a percentage of the total
United Kingdom portfolio were 12.8% and 2.9% at December 31, 1998 and 1997,
respectively.

                                      F-12


<PAGE> 

                           FIRST ALLIANCE CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
        FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998

NOTE 5.  FINANCING FACILITIES AND WAREHOUSE FINANCING RECEIVABLE

    The Company has two separate financing facilities. The first facility is a
$150 million warehouse financing facility. The second is a secured term loan
facility of approximately $66 million, which was entered into with a company
owned by the majority stockholders of FACO. The $150 million warehouse financing
facility is secured by loans originated or purchased by the Company, bears
interest at a rate ranging between 1.25% to 1.75% over one month United States
dollar denominated London Interbank Offered Rate ("LIBOR"), and expires in
December 1999. As partial consideration for the $150 million warehouse financing
facility, the Company agreed to grant the warehouse lender stock warrants
equaling one percent (1%) of the diluted shares outstanding, with an effective
date of February 1999. The Company will account for these warrants by recording
the fair value of the warrants to debt issuance costs and additional paid in
capital. Debt issuance costs will be amortized over 12 months. This transaction
is not expected to have a material effect on the Company's financial condition,
results of operations or cash flows. The $66 million, secured term loan facility
is secured by mortgages held for investment, bears a fixed interest rate of
8.5%, and matures as the underlying pledged mortgages are liquidated. These
facilities contain certain affirmative and negative covenants with which the
Company was in compliance at December 31, 1998.

    The following table presents data on the lines of credit for the years ended
December 31:
<TABLE>
<CAPTION>

                                                                                  1996           1997           1998
                                                                                ----------    ----------    ----------
                                                                                        (Dollars in thousands)
        <S>                                                                     <C>           <C>           <C>
        Weighted average interest rate for the period......................          6.30%         6.67%         6.82%
        Weighted average interest rate at the end of the period............          6.30%         7.20%         8.15%
        Average amount outstanding for the period..........................     $  30,507     $  46,596     $ 107,362
        Maximum amount outstanding at any month-end........................     $  65,262     $ 124,702     $ 150,252
</TABLE>


    In 1997, the Company entered into agreements to provide warehouse financing
facilities to two mortgage banking companies ("Borrowers") that are controlled
by related parties. During 1998, subsequent to receiving full repayment on the
outstanding warehouse financing facilities, the Company terminated the
arrangement with the Borrowers.


NOTE 6.  OTHER BORROWINGS

    At December 31, 1998, the Company had a borrowing of $6.5 million with an
interest rate of 8.3%. This borrowing was collateralized by certain real estate
loans with an aggregate principal balance of $6.5 million. The borrowing was
repaid in January of 1999.


NOTE 7.  EMPLOYEE BENEFIT PLAN

    The Company has a 401(k) defined contribution plan, which was established in
1994, available to all employees who have been with the Company for six months
and have reached the age of 21. Employees may generally contribute up to 15% of
their salary each year and the Company, at its discretion, may match up to 25%
of the first 7% contributed by the employee. The Company's contribution expense
was $248,000, $175,000 and $120,000 for the years ended December 31, 1998, 1997
and 1996, respectively.


                                      F-13

<PAGE> 

                           FIRST ALLIANCE CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
        FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998

NOTE 8.  INCOME TAXES

    Through the date of the Offering in 1996 and in 1995 the Company elected to
be treated for Federal income and certain state tax purposes as an S corporation
whereby its taxable income was included in the individual returns of the
stockholders. As an S corporation, the Company was subject to certain state
taxes, primarily in California. Upon consummation of the Offering, the Company
became a C corporation subject to Federal and state income taxes. The income tax
provision for 1996 represents S corporation taxes prior to the Offering, C
corporation taxes subsequent to the Offering and net deferred tax assets
recognized upon the conversion from an S corporation to a C corporation. The
reconciliation of income tax computed at the Federal statutory tax rate to the
Company's effective income tax rate is as follows for the years ended December
31:
<TABLE>
<CAPTION>

                                                                                  1996           1997          1998
                                                                                ----------    ----------    ----------
        <S>                                                                     <C>           <C>           <C>
        Tax at Federal statutory rate......................................          35.0%         35.0%         35.0%
        State income taxes, net of Federal benefit.........................           3.9           4.0           5.1
        Benefit for S corporation period taxation..........................         (14.5)                          
        Effect of conversation to C corporation............................          (8.4)                          
        Other..............................................................                        (1.2)         (2.0)
                                                                                ----------    ----------    ----------
        Effective rate......................................................         16.0%         37.8%         38.1%
                                                                                ===========   ===========   ==========
</TABLE>
<TABLE>
<CAPTION>

    The components of the provision for income taxes are as follows for the
years ended December 31:

                                                                                  1996           1997          1998
                                                                                ----------    ----------    ----------
                                                                                         (Dollars in thousands)
        Current:
<S>                                                                             <C>           <C>           <C>      
            Federal.........................................................    $   7,204     $  14,299     $   2,605
            State...........................................................        1,924         1,805           473
                                                                                ----------    ----------    ----------
        Total current.......................................................        9,128        16,104         3,078
                                                                                ----------    ----------    ----------

        Deferred:
            Federal........................................................        (3,289)        3,778         6,028
            State...........................................................          261           703         1,178
            Foreign.........................................................                       (712)       (1,547)
                                                                                ----------    ----------    ----------
        Total deferred .....................................................       (3,028)        3,769         5,659
                                                                                ----------    ----------    ----------

        Total.................................................................  $    6,100    $   19,873    $   8,737
                                                                                ===========   ===========   ==========
</TABLE>

                                      F-14

<PAGE> 


                           FIRST ALLIANCE CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
        FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998

    Deferred tax assets and liabilities reflect the temporary differences
between financial reporting and tax basis of assets and liabilities and are
measured by applying enacted tax rates and laws to taxable years in which such
temporary differences are expected to be recovered or settled. The following are
the significant components of the Company's deferred tax assets and liabilities
as of December 31:

                                                            1997          1998
                                                        ----------    ----------
                                                         (Dollars in thousands)
        Deferred tax assets:
            Residual interests......................... $   1,084     $      --
            Foreign loss carry forward.................       963         2,451
            State taxes................................       786           797
            Mark-to-market on loans held for sale......       368           634
            Legal expenses.............................        78           469
            Reserve for bad debts......................                     333
            Other......................................       224           440
                                                        ----------    ----------
         Total......................................... $   3,503     $   5,124
                                                        ==========    ==========

        Deferred tax liabilities:
            Residual interest..........................               $   7,402
            Mortgage servicing rights.................. $   3,465         4,452
            Other .....................................       708           569
                                                        ----------    ----------
        Total.........................................  $   4,173     $  12,423
                                                        ==========    ==========


NOTE 9.  COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS OF RISK

    The Company's operations are conducted from leased facilities located in
various areas of the United States and the United Kingdom. These leases have
clauses which provide for increases in rent based on increases in the cost of
living index and options for renewal. The future minimum lease payments are as
follows:

        YEARS ENDING DECEMBER 31:                         (Dollars in thousands)

        1999............................................       $  2,333
        2000............................................          2,217
        2001............................................          2,051
        2002............................................          1,675
        2003............................................            468

    In the ordinary course of business, the Company has liability under
representations and warranties made to purchasers and insurers of mortgage
loans. Under certain circumstances, the Company may become liable for the unpaid
principal and interest on defaulted loans or other loans if there has been a
breach of representation or warranties.

    In December 1998, the Company entered into a secured term loan facility of
approximately $66 million in order to provide long-term financing for its United
Kingdom subsidiary. The underlying collateral for the facility represents United
Kingdom mortgage loans. The Company is obligated to repay this facility in
amounts equal to the value of United States dollars at the exchange rate in
effect on the date of the agreement. Consequently, the Company bears a foreign
currency risk between the assets held by the United Kingdom subsidiary and the
obligation of debt. The Company is currently in the process of evaluating the
possibilities of entering into a foreign currency hedge to protect itself from
foreign currency fluctuations.

                                      F-15

<PAGE> 


                           FIRST ALLIANCE CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
        FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998

    The Company has negotiated employment agreements with certain officers.
These agreements provide for the payment of base salaries, the issuance of
common stock via incentive stock option program subject to certain restrictions
and the payment of severance benefits upon termination.

    In September 1998, the Company was informed by the United States Department
of Justice ("DOJ") that it and the Attorneys General of Arizona, Florida,
Illinois, Massachusetts, Minnesota, New York and Washington have initiated a
joint investigation into the lending practices of the Company. That
investigation and any negative findings that may result therefrom could have a
significant adverse effect on the Company's ability to obtain new and renew
state lending licenses, which, in turn, could have a significant adverse effect
on the Company's ability to maintain or expand its retail branch network of
offices and on the Company's results of operations and financial condition.

    The Company is involved in certain litigation arising in the normal course
of business. Currently the Company believes that any liability with respect to
such legal actions, individually or in the aggregate, is not likely to be
material to the Company's consolidated financial position or consolidated
results of operations.

    At December 31, 1998, loans related to property located in the state of
California comprised approximately 43% of the total serviced loan portfolio
while no other state comprised more than 10%.

    The Company funds substantially all of the loans it originates or purchases
through borrowings under its warehouse financing facilities and internally
generated funds. These borrowings are in turn repaid with the proceeds received
by the Company from selling such loans through loan sales or securitizations.
Any failure to renew or obtain adequate funding under those warehouse financing
facilities, or other borrowings, or any substantial reduction in the size of or
pricing in the markets for the Company's loans, could have a material adverse
effect on the Company's operations. To the extent that the Company is not
successful in maintaining or replacing existing financing, it would have to
curtail its loan production activities or sell loans earlier than is optimal,
thereby having a material adverse effect on the Company's consolidated financial
condition and consolidated results of operations.

    The value of and market for the Company's loans are dependent upon a number
of factors, including general economic conditions, interest rates and
governmental regulations. Adverse changes in such factors may affect the
Company's ability to sell loans for acceptable prices within a reasonable period
of time. A prolonged, substantial reduction in the size of the secondary market
for loans of the type originated or purchased by the Company may adversely
affect the Company's ability to sell loans in the secondary market with a
consequent adverse impact on the Company's results of operations, financial
condition and ability to fund future originations and purchases.

    Since 1992, the Company has pooled and sold through securitizations an
increasing percentage of the loans which it originates. The Company derives a
significant portion of its income by recognizing gains upon the sale of loans
through securitizations. These gains are due in part to the value recorded at
the time of sale of residual interests and retained mortgage servicing rights.
Adverse changes in the securitization market could impair the Company's ability
to purchase and sell loans through securitizations on a favorable or timely
basis. Any such impairment could have a material adverse effect upon the
Company's consolidated financial condition and consolidated results of
operations.

    The Company has relied on credit enhancement to achieve a "AAA/aaa" rating
for the regular interests of the trusts in its securitizations. The credit
enhancement has generally been in the form of an insurance policy issued by an
insurance company insuring the timely repayment of the regular interests in each
of the securitization trusts. There can be no assurance that the Company will be
able to obtain credit enhancement in any form from the current insurer or any
other provider of credit enhancement on acceptable terms or that future
securitizations will be similarly rated. A downgrading of the insurer's credit
rating or its withdrawal of credit enhancement could have a material adverse
effect on the Company's consolidated financial condition and consolidated
results of operations.

                                      F-16


<PAGE> 

                           FIRST ALLIANCE CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
        FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998

NOTE 10.  STOCKHOLDERS' EQUITY

    The Company's shares of Class A and Class B Common Stock are identical,
except with respect to voting rights and the right to convert Class B Common
Stock to Class A Common Stock. Holders of Class A Common Stock are entitled to
one vote for each share held of record, and holders of Class B Common Stock are
entitled to four votes for each share held of record. Each share of Class B
Common Stock is freely convertible into one share of Class A Common Stock at the
option of the Class B stockholder. In July of 1998, the majority stockholders of
FACO converted all of their Class B Common Stock into Class A Common Stock.

    During 1996, FAMCO distributed S distribution notes of $45.0 million to its
stockholders. Such amount has been recorded as a dividend to Class B common
stockholders. In 1996, payments on the S distribution notes of $45.0 million
were made by the Company using proceeds from the Offering.

    On May 11, 1996, the Company's Board of Directors approved a stock split of
its common stock whereby approximately 710 shares of common stock were issued
for each outstanding share of common stock. All share and per share amounts
included in the accompanying consolidated financial statements and footnotes
have been restated to reflect the stock split.

    In June 1996, FAMCO granted 161,250 shares of restricted common stock to an
officer of the Company. These shares, which were exchanged for 161,250 shares of
FACO Class B Common Stock in conjunction with the Offering, vest over a period
of five years or earlier upon the occurrence of certain events. A value of $1.6
million was ascribed to such shares by the Company. This amount has been
recorded in the accompanying financial statements as increases to Class B Common
Stock and paid in capital with an offsetting amount included in deferred stock
compensation. In 1997 and 1996, 36,053 and 43,927 shares of such restricted
Class B Common Stock, respectively, had vested. During 1997 and 1996, $0.3
million and $0.5 million of compensation expense, respectively, was recognized.
In 1998, however, the remaining 81,270 shares of restricted stock were forfeited
due to the officers' termination.

    In July 1996, the shareholders approved a stock incentive plan for
directors, officers and other key employees of the Company, under which
2,125,000 shares of Class A Common Stock were available for grant. Under the
plan, options vest 25% six months from the date of grant and 25% each year
thereafter until fully vested and expire on the earlier of ten years from the
date of grant or 90 days after an optionee's termination of service. The
following is a summary of changes in the stock incentive plan during the years
ended December 31:
<TABLE>
<CAPTION>

                                      1996                               1997                              1998
                           ----------------------------     -------------------------------    ------------------------------
                                            WEIGHTED                           WEIGHTED                           WEIGHTED
                                             AVERAGE                           AVERAGE                            AVERAGE
                             NUMBER         EXERCISE          NUMBER           EXERCISE           NUMBER          EXERCISE
                            OF SHARES         PRICE          OF SHARES          PRICE           OF SHARES          PRICE
                           ------------    ------------     ------------    ---------------    -------------    -------------
<S>                        <C>             <C>              <C>             <C>                <C>              <C>
Beginning of period......            -                          793,625     $        11.33          816,750     $      12.16
Grants...................      793,625     $     11.33          117,779              17.04          471,125             9.95
Exercises................            -                          (59,145)             11.33          (45,913)           11.47
Cancellations............            -                          (35,509)             11.33         (243,368)           12.47
                           ------------                     ------------                       -------------
End of period............      793,625     $     11.33          816,750           $  12.16          998,594     $      11.06
                           ============                     ============                       =============
</TABLE>

                                      F-17

<PAGE> 

    Summary information related to stock options outstanding as of December 31,
1998 is as follows:

                           FIRST ALLIANCE CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
        FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>

                                                           ----------------------------------    -------------------------------
                                                                  OPTIONS OUTSTANDING                 OPTIONS EXERCISABLE
                                                           --------------- -- ---------------    -------------- --- ------------
                                                                                REMAINING                            WEIGHTED
                                                              OPTIONS          CONTRACTUAL          NUMBER            AVERAGE
                                         EXERCISE           OUTSTANDING            LIFE           EXERCISABLE        EXERCISE
                                          PRICE             AT 12-31-98         (IN YEARS)        AT 12-31-98          PRICE
                                     -----------------     ---------------    ---------------    --------------     ------------
<S>                                  <C>                   <C>                <C>                <C>                <C>
                                     $ 4.25  - $ 9.25             216,219                9.8               675       $     9.25
                                     $11.33  - $21.92             782,375                8.0           319,714            12.14
                                                           ---------------                       --------------
Total.............................                  -             998,594                  -           320,389                -
                                                           ===============                       ==============
Combined weighted average.........                                                       8.3                         $    12.14
                                                                              ===============                       ============
</TABLE>


    The Company accounts for its stock incentive plan based on the intrinsic
value of a grant as of the date of the grant in accordance with Accounting
Principles Board Opinion No. 25. Accordingly, no compensation expense has been
recognized in 1998, 1997 or 1996 for options granted under the Company's stock
incentive plan. Had compensation cost been recognized in accordance with the
fair value provisions of SFAS No. 123, pro forma net income would have been
$13.1 million, $31.6 million and $31.3 million in 1998, 1997 and 1996,
respectively, and net income per diluted share would have been $0.67, $1.44 and
$1.68 in 1998, 1997 and 1996, respectively. The fair value of each option grant,
a weighted average of $4.99, $9.84 and $8.55 for options granted in 1998, 1997
and 1996, respectively, was estimated as of the date of grant using the
Black-Scholes option pricing model. The Company's calculations are based on a
single option valuation approach and forfeitures are recognized as they occur.
The weighted average assumptions used for grants in 1998 were: no dividend
yield; expected volatility of 55%; risk-free interest rate of 5.11%; and
expected lives of 5 years. The weighted average assumptions used for grants in
1997 were: no dividend yield; expected volatility of 33%; risk-free interest
rate of 6.12%; and expected lives of 10 years. The weighted average assumptions
used for grants in 1996 were: no dividend yield; expected volatility of 59%,
risk free interest rate of 6.65% and expected lives of 10 years.

    In April 1997 the Board of Directors approved a share repurchase program
under which the Company was authorized to purchase up to 1.5 million shares of
its Class A Common Stock. In January 1998 and July 1998, the Board of Directors
authorized the purchase of an additional 2.0 million shares and 4.0 million
shares of Class A Common Stock, respectively. Of the 7.5 million shares
authorized, the Company had repurchased approximately 4.0 million shares as of
December 31, 1998.

                                      F-18


<PAGE> 


                           FIRST ALLIANCE CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
        FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998

NOTE 11.  NET INCOME PER SHARE

    A reconciliation of the numerators and denominators used in basic and
diluted net income per share are as follows for the years ended December 31:
<TABLE>
<CAPTION>

                                                                                   1996            1997            1998
                                                                                ------------    ------------    ------------
                                                                                             (Dollars in thousands)
        <S>                                                                     <C>             <C>             <C>
        Net income:  Basic and diluted.............................             $    32,139     $    32,772     $    14,216
                                                                                ============    ============    ============

        Weighted average number of common shares
            Basic                                                                18,638,423      21,851,732      19,380,119
            Effect of dilutive securities - stock options..........                  34,449         178,706          51,100
                                                                                ------------    ------------    ------------
            Diluted................................................              18,672,872      22,030,438      19,431,219
                                                                                ============    ============    ============

        Net income per share
            Basic..................................................             $      1.72     $      1.50     $      0.73
            Effect of dilutive securities - stock options..........                       -            0.01               -
                                                                                ------------    ------------    ------------
            Diluted................................................             $      1.72     $      1.49     $      0.73
                                                                                ============    ============    ============
</TABLE>



NOTE 12.  RELATED PARTY TRANSACTIONS

    For the three years ended December 31, 1998, the Company entered into
transactions with the following related parties: the majority stockholder of the
Company, entities in which the majority stockholder of the Company has a
controlling interest and companies owned by family members of the majority
stockholder of the Company. The following amounts represent related party
transactions for the years ended December 31:
<TABLE>
<CAPTION>

                                                                                    1996            1997            1998
                                                                                ------------    ------------    ------------
                                                                                            (Dollars in thousands)
        <S>                                                                     <C>             <C>             <C>

        Loans sold to related parties..............................             $       515               
        Loans purchased from related parties:
            Loans purchased........................................                  31,033     $    68,668     $    50,353
            Premiums paid .........................................                   1,208           2,658           1,534
        Other fees received from related parties...................                     186              
        Payments to related parties:
            Rent payments..........................................                     464             521             581
        Interest paid to principal stockholders on  notes payable to 
            stockholder and S distribution notes...................                     612              
        Interest received from related parties.....................                                     688             590
</TABLE>

                                      F-19

<PAGE> 


                           FIRST ALLIANCE CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
        FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998

    The following amounts represent related party balances as of December 31:
<TABLE>
<CAPTION>

                                                                                   1997          1998
                                                                                ----------    ----------
                                                                                 (Dollars in thousands)
<S>                                                                             <C>           <C>

Loans serviced for related parties.................................             $  3,882      $  3,298
Receivables from officers and directors of the Company.............                  194            22
Balance outstanding on warehouse lines to related parties..........               12,324             
Balance outstanding on loan facility due to majority stockholder...                             64,720
</TABLE>



NOTE 13.  FINANCIAL INSTRUMENTS

    The Company regularly securitizes and sells fixed and variable rate mortgage
loans. As part of its interest rate risk management strategy, the Company hedges
its interest rate risk related to its loans held for sale and origination
commitments by selling short or selling forward United States Treasury
Securities. For accounting purposes, selling short United States Treasury
Securities is not considered to be a hedge. Therefore, when selling short United
States Treasury Securities, the Company has recognized realized and unrealized
gains and losses on hedging activities in the period in which they occur. The
Company classifies forward sales of United States Treasury Securities as hedges
of specific loans held for sale or commitments to fund loans held for sale. The
gains and losses derived from these transactions are deferred and included in
the carrying amounts of loans held for sale and are recognized in earnings upon
the sale of loans hedged. Net gains and (losses) recognized on hedging
activities were ($1,743,000), ($161,000) and $434,000 for the years ended
December 31, 1998, 1997 and 1996, respectively. The notional amount of forward
sales of United States Treasury Securities at December 31, 1998 was $9.0 million
with deferred gains of $29,000.

    The following disclosures of the estimated fair value of financial
instruments as of December 31, 1998 and 1997 are made in accordance with the
requirements of SFAS No. 107, "Disclosure About Fair Value of Financial
Instruments." The estimated fair value amounts have been determined by the
Company using available market information and appropriate valuation
methodologies. However, considerable judgment is necessarily required to
interpret market data to develop the estimates of fair value. Accordingly, the
estimates presented herein are not necessarily indicative of the amounts the
Company could realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.

                                      F-20

<PAGE> 

                           FIRST ALLIANCE CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
        FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998

<TABLE>
<CAPTION>

                                                                                           1997                      1998
                                                                                ------------------------- --------------------------
                                                                                 CARRYING      ESTIMATED     CARRYING    ESTIMATED
                                                                                  AMOUNT       FAIR VALUE     AMOUNT     FAIR VALUE
                                                                                -----------  ------------  -----------  ------------
                                                                                              (Dollars in thousands)
    <S>                                                                         <C>          <C>           <C>          <C>
    Assets:
        Cash and cash equivalents...................................            $   14,032   $    14,032   $   18,052   $    18,052
        Loans held for sale.........................................                54,872        60,224       24,421        26,116
        Loans receivable held for investment........................                 2,082         2,317       57,667        64,726
        Warehouse financing receivables.............................                12,324        12,324          ---           ---
        Residual interests..........................................                50,238        50,238       48,720        48,720
    Liabilities:
        Warehouse financing facilities..............................                57,742        57,742       17,539        17,539
        Secured term loan facility - related party..................                                           64,720        64,720
        Other borrowings............................................                                            6,545         6,545
        Notes payable ..............................................                    25            25           14            14
</TABLE>

    The fair value of loans is estimated based upon prices received by the
Company for loans it sells.

    The fair value of warehouse financing receivables is based on rates and
terms currently available to companies of similar size as those to which the
Company has provided these facilities.

    The fair value of residual interests is estimated based upon discounted cash
flows.

    Rates currently available to the Company for debt with similar terms and
remaining maturities, were used to estimate the fair value of warehouse
financing facilities, other borrowings and the notes payable.

    The fair value estimates presented herein are based on pertinent information
available to management as of December 31, 1998 and 1997. Although management is
not aware of any factors that would significantly affect the estimated fair
value amounts, such amounts have not been comprehensively revalued for purposes
of these consolidated financial statements since that date and, therefore,
current estimates of fair value may differ significantly from the amounts
presented herein.

    The Company is exposed to on-balance sheet credit risk related to its loans
held for sale, residual interests and loans receivable held for investment. The
Company is exposed to off-balance sheet credit risk related to loans which the
Company has committed to originate. The Company is party to financial
instruments with off-balance sheet credit risk in the normal course of business.
These financial instruments include commitments to extend credit to borrowers.
At December 31, 1998 and 1997, the Company had outstanding commitments to extend
credit in the amounts of $7.8 million and $20.4 million, respectively.

                                      F-21


<PAGE> 

                           FIRST ALLIANCE CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
        FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998

NOTE 14.  DOMESTIC AND FOREIGN OPERATIONS

    Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker, or decision making group, in deciding how to
allocate resources in assessing performance. The Company has two reporting
segments: United States operations and United Kingdom operations.

    GEOGRAPHIC AREA - During 1998 and 1997, the Company operated in two
geographical areas consisting of the United States and the United Kingdom. There
were no significant transfers between geographical areas during such periods.


    The following table represents revenue and income before income tax
provisions for the years ended December 31:

                                                           1997          1998
                                                        ----------    ----------
                                                         (Dollars in thousands)

        Revenue:
             United States............................  $  93,772     $  78,383
             United Kingdom...........................      1,877         5,425
                                                        ----------    ----------
                  Total...............................  $  95,649     $  83,808
                                                        ==========    ==========

        Income (loss) before income tax provision:
             United States............................  $  54,680     $  26,314
             United Kingdom...........................     (2,035)       (3,361)
                                                        ----------    ----------
                 Total................................  $  52,645     $  22,953
                                                        ==========    ==========

    The following table represents identifiable assets of the Company as of
December 31:

                                                           1997          1998
                                                        ----------    ----------
                                                         (Dollars in thousands)
        Identifiable assets:
             United States............................  $ 128,104     $ 119,202
             United Kingdom...........................     30,043        58,401
                                                        ----------    ----------
                 Total................................  $ 158,147     $ 177,603
                                                        ==========    ==========

                                      F-22


<PAGE> 

                          FIRST ALLIANCE CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
        FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998

NOTE 15.  SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>

                                                                       FIRST         SECOND        THIRD         FOURTH
        (Dollars in thousands except per share amounts)                QUARTER       QUARTER       QUARTER       QUARTER
        ------------------------------------------------------------------------------------------------------------------
        <S>                                                            <C>           <C>           <C>           <C>
        1996
             Total revenue.........................................    $ 14,810      $ 17,024      $ 18,922      $ 20,115
             Income before income tax provision....................       7,860         9,306         9,891        11,182
             Net income............................................       7,742         9,167         8,633         6,597
             Comprehensive income..................................       7,742         9,167         8,633         6,559
             Basic net income per share............................        0.48          0.57          0.42          0.30
             Diluted net income per share..........................        0.48          0.57          0.42          0.30

        1997
             Total revenue.........................................    $ 21,437      $ 23,244      $ 23,395      $ 27,573
             Income before income tax provision....................      12,860        13,168        12,106        14,511
             Net income............................................       7,684         7,866         8,188         9,034
             Comprehensive income..................................       7,722         7,863         8,092         9,066
             Basic net income per share............................        0.35          0.36          0.38          0.42
             Diluted net income per share..........................        0.34          0.36          0.37          0.42

        1998
             Total revenue.........................................    $ 25,370      $ 15,810      $ 22,560      $ 20,068
             Income before income tax provision....................      11,667         1,256         6,212         3,818
             Net income............................................       7,262           781         3,833         2,340
             Comprehensive income..................................       7,315           773         3,851         1,666
             Basic net income per share............................        0.35          0.04          0.21          0.13
             Diluted net income per share..........................        0.35          0.04          0.21          0.13
</TABLE>

                                      F-23


<PAGE> 



 INDEPENDENT AUDITORS' REPORT
 ----------------------------





To the Board of Directors and Stockholders of
First Alliance Corporation

We have audited the accompanying consolidated statements of financial condition
of First Alliance Corporation and subsidiaries (the Company) as of December 31,
1998 and 1997, and the related consolidated statements of income, comprehensive
income, stockholders' equity and cash flows for each of the three years in the
period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion of these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of First Alliance Corporation and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.



Costa Mesa, California
January 25, 1999

                                      F-24